August 9, 2001

Market Advisor: Evaluate Marketing Alternatives for Low Quality Grain

by George Flaskerud, Crops Economist
NDSU Extension Service

What should you do with poor quality grain? Probably the worst strategy would be to sell it off the combine.

Discounts for quality are generally the most severe at harvest. The marketing system cannot handle a lot of poor quality at one time, so discounts are increased to discourage harvest delivery and to encourage farm storage.

Discounts generally decrease after harvest as the marketing system is able to assimilate the lower quality grain. Low quality durum that was 75 cents per bushel at harvest a year ago brought $1.50 in July. Spring wheat increased from 80 cents per bushel to $1.60 during the same period. For the 1999 crop, low quality spring wheat increased from $1.25 per bushel at harvest to $2.00 by the following February.

A common and generally profitable strategy during the past two years has been to take the loan deficiency payment at harvest and store until at least February. While this strategy is likely to be the most profitable, it is also the most risky, since the net price may not increase enough to justify storage. Also, this strategy is less beneficial to cash flow than others since the majority of the funds could not be collected until the grain is sold.

A less risky but likely less profitable strategy is to take out a government loan and then monitor the elevator price net of discounts for a profitable opportunity to repay the loan and sell. As a last resort, the grain could be held until loan maturity and delivered to the Commodity Credit Corporation (CCC), in which case you will be billed for discounts at settlement.

In pursuing alternative strategies, make sure that grain of different qualities are segregated. It may be profitable for some or all of the grain to be cleaned and or blended.

Once the grain is in the bin, check quality by getting a representative sample for each bin by using a probe. Make sure you get a sample for each bin. Some elevators will secure samples for you. Have one or more elevators grade each sample and determine falling numbers in the case of wheat. Samples can also be sent to a licensed official agency for evaluation.

To get an idea of the value of your grain in each bin, obtain several bids on the samples from elevators. Take the grades on your grain samples to your local Farm Service Agency (FSA) for their estimate of the loan settlement value on each sample.

Keep in mind that an estimate of loan settlement value is just that, an estimate, and is based on your sample. It does not matter whether the sample was taken by you or the elevator. These estimates are not binding with the FSA, since the loan settlement value of forfeited grain is based only on the grade of the grain actually delivered.

Elevator bids based on samples are also generally not binding, although some elevators may give you a binding bid if they sample your bins.

A schedule of CCC discount factors can be found on the internet. The internet address is http://www.fsa.usda.gov/dafp/psd/loan_premiums.htm .

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Source: George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu