Profit Today, Volatility Tomorrow: Outlook on Grain Elevators

By Kenneth Scott Zuckerberg, CoBank, ACB

CoBank, which is part of the U.S. Farm Credit System and provides loans and financial services to cooperatives, agribusinesses, rural public utilities and other farm credit associations, recently published a new report: “Grain Elevator Outlook: Accelerating Merchandising Margins Today, Potential Volatility Tomorrow”. The report, authored by Kenneth Scott Zuckerberg, CoBank’s lead analyst and senior economist for grain, farm supply, and ethanol, speaks to the explosive rally in commodity prices since mid-August and how that pulled forward grain merchandising, resulting in strong profits. Also noted is the inverted futures curve (for corn and soybeans), which is presenting some challenges, in the near-term.

Below are highlights of the December 2020 report, and a link to the full version.

• An explosive rally in grain prices – driven by a smaller-than-expected U.S. harvest, strong China export demand, dryness concerns due to La Niña, and resulting tight corn and soybean stocks – dramatically changed the complexion of the 2020-21 grain marketing season. The resulting effect was grain cooperatives accelerated merchandising as farmers rushed to sell and lock in gains. In doing so, elevators were able to capture strong margins on old crop, as well as on new crop, which they bought and resold into a rising market.

• This activity has required elevators to increase borrowings under existing credit lines and/or to obtain large increases to their seasonal borrowing programs. CoBank has actively supported customers’ funding needs, specifically the cash flow timing mismatch between current cash outflows (for grain purchases) and delayed capital inflows (payables from processors and exporters).

• Having already accelerated merchandising, elevator activities will be limited over the next three months until the market has greater visibility as to U.S. planting intentions for 2021-22 as well as the size and quality of the crops from the ABUR (Argentina, Brazil, Ukraine, and Russia) growing regions. Given the continued inversion in futures prices, we see volatility ahead that could limit opportunities for elevators to buy basis cheap and capture carry, at least during the near-term. However, grain cooperatives that also have farm supply divisions should benefit from a strong fall application season, and what we believe will be an acceleration of farmer prepayments of spring crop inputs prior to year-end.

Download the full report here.

About Kenneth Scott Zuckerberg

Kenneth Scott Zuckerberg is a lead analyst and senior economist in CoBank’s Knowledge Exchange division, where he focuses on the grains, farm supply, and ethanol sectors.

Zuckerberg brings more than 30 years of diverse experience spanning securities analysis, investment management, and banking. Prior to joining CoBank, he served as a senior vice president and sector manager for Wells Fargo, working with the bank’s Food and Agribusiness Industry Advisors Group, and previously held a similar role at Rabobank U.A. Earlier in his career, Zuckerberg founded Carlan Advisors LLC, an independent research and consulting firm. Prior to that, he was a senior equity analyst at Lazard Asset Management, Keefe, Bruyette and Woods, Inc., and Smith Barney, Inc. (now Morgan Stanley).

Zuckerberg earned a bachelor’s degree in finance from the University of South Florida and is a graduate of the University of Pennsylvania – Wharton Executive Education General Management Program (GMP). He is an Accredited Investment Fiduciary AIF®, an Accredited Financial Analyst AFA®, and completed Levels I and II of the Chartered Financial Analyst (CFA®) program. He is currently enrolled in the Master in Law program at the University of Pennsylvania Carey Law School.