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Anatomy of a grain trade

Anatomy of a grain trade

Mar 01, 2018
The global grain trading business is risky. Avalanches and mudslides can stop trains in their tracks. Striking union workers can halt grain loading at port. Freezing sea spray and high swells can delay ocean vessels for days. Commodity prices and costs shift constantly. 

While those situations may be beyond a grain company's control, there are countless other factors that a team of CHS experts successfully manages 365 days a year - always focused on efficiency, safety and profitability. 

"Grain traders are problem-solvers," says Justin Friesz, CHS global grain coordinator. "We anticipate issues and deliver solutions. We deploy critical thinking skills to manage risks. We create sufficient volume to generate efficiencies. And we collaborate as a team to focus on customer service and deliver grain when and where it's needed. It's a balancing act. We need a home for all that grain." 

That vigilance never stops, he adds. "Some risks recur at various points of the journey, with the most common being demurrage (penalties for delays at terminals), force majeure (unforeseeable circumstances), price, shrinkage, credit and quality risk."

Ready and waiting
CHS has built an extensive grain origination network that links American farmers' commodities to world markets with the highest level of quality control. For milling wheat headed to China, this includes strategic joint ventures at Pacific Northwest export facilities and a facility at the Port of Nantong that allows CHS to wield more control over grain handling speed and uniformity. 

Beyond physical assets, CHS has invested in people who can help ensure purchased grain gets to the right destination on time and  per specifications. 

"It takes an army to execute a trade," says Friesz. "Grain must be ready at the elevator to load the ship, the right ship must be in position, and the right documentation must be in place. Timing is everything. Once delays start, the penalties keep growing."

"As we work through every step, we encounter risks and mitigate them," says Brock Lautenschlager, director of rail services for CHS. "The one constant is that plans will change and, in the logistics business, they will change multiple times a day." 

The centralized CHS rail team monitors temperature patterns, weekly rail maintenance activity and the number of grain cars loaded. Any of those factors can point to delays that may require backup plans - not just for the grain division, but also for the cooperative system's crop nutrients, propane and other businesses. 

The CHS Grain Marketing team also keeps a collective eye on the Baltic Dry Index (an economic indicator of the cost of moving major raw materials by sea); developing weather; and fluctuating fuel, labor and port costs. 

"The ocean freight market is often more volatile than the grain market," says Justin Cauley, manager of global bulk ocean freight, CHS. To help reduce risk, CHS works with oceangoing vessel owners with proven track records of seaworthiness, cleanliness and overall good management. 

Relationships matter
Having company-owned assets and a global presence benefits both growers and customers. The CHS Shanghai team, for example, plays a critical role in overseeing grain trade execution, marketing and credit. The team members evaluate and build relationships with strong buyers who have both the ability to manage ongoing local sales and the financial strength to accept ocean freight risk.

One of the biggest challenges is making sure that the end of the long journey full of unforeseen events, grain quality meets customer specifications. "The high percentage originated by rail puts stress on the system. That's a lot of logistics to manage," says Friesz.

"China produces wheat for general food purposes, but not the same type of high-quality wheat grown by the dedicated farmers who own CHS," says Liu Guaqiang, general manager of CHS Shanghai. "By managing quality throughout the supply chain, the CHS system can consistently deliver high-value milling wheat that is in demand as Western food becomes more popular in other parts of the world."

2-3 N.D. Elevator and Temco
When the high temperature drops below zero degrees Fahrenheit, CHS plans for slower rail service, since railroads must run shorter trains or add locomotives to trains to keep sufficient air in braking systems.

"If loaded railcars don't make it to the export terminal in time to load the oceangoing vessel within the ship owner's time frame, we're charged penalties of as much as $14,000 per day," says Cauley.

Kalama Terminal

3 Temco
Approximately 50 percent of U.S. wheat exports are executed from the Pacific Northwest (PNW).

Most wheat that goes through the PNW arrives by rail - about 3,000 110-car shuttles a year. 

When a ship arriving at the terminal is not clean enough to transport grain, loading and departure may be delayed by several days. 

CHS export terminals in the PNW have a combined storage capacity of approximately 1 million metric tons and moved 44 million metric tons of wheat, corn and soybeans in the 2016-2017 shipping season. 

3-4 Ocean Transit

Over the last 10 years, ocean freight costs have seen tremendous volatility. In 2008, it cost as much as $7.5 million to make a round trip with a Panamax in the North Pacific. Today, the same voyage would cost $1.5 million. 

Nearly 30 percent of CHS wheat sales to Asia are cost-and-freight contracts with a delivery deadline. A delay of one to four days reduces cargo value by 0.5 percent; a delay of five to six days reduces cargo value by 1 percent; a delay of seven to eight days reduces cargo value by 1.5 percent; and a delay of nine or more days cancels the contract price. 

4 Port of Nantong
"At the receiving end, if your documentation isn't satisfactory and you're not allowed to discharge to waiting trucks, you incur demurrage, which is a late fee of $14,000 per day," says Cauley.

5 Joint Venture at Nantong
To help control consistency of grain quality from origin to destination, CHS has exclusive rights to the elevator capacity at its joint venture in Nantong.

Local Co-ops Help Manage Quality Risk
Local co-ops play an important role in controlling risk in the global grain supply chain, especially when it comes to maintaining quality.

"We have invested in modern terminals on the Mississipi River. We carefully condition and dry the grain, ensuring there is adequate air circulation and we keep grain moving to protect quality," says Scott Meyer, commercial grain merchandiser for Ursa Farmers Cooperative in Ursa, Ill.

"We also lease the best barges available so our transit times to the Gulf vary by only four or five days. When CHS buys wheat, corn or soybeans from us, they know they can count on getting quality grain from one of our four elevators, delivered on time, which reduces its risk."