Constant Moisture Grain Marketing or the Equivalent Bushel Concept
Farm Business Management Update, February 2001
By Eluned Jones
"Pencil shrink," shrink factor, drying charges, load averaging, discounts are all terms that a producer will see at the elevator adjusting price to reflect quantity and quality changes in grain associated with moisture content. Grain handlers and processors are not going to pay for excess water and will dry the grain to the optimum level for storage and handling. The expected value associated with the grain is diminished by the cost of drying and the difference due to shrink.
In load averaging, the moisture contents of different loads delivered by the same producer are averaged, similar to the overall effect if physical blending had occurred before delivery. However, if a price discount is used as the only form of adjustment for moisture, the discount rate will need to change each time the market price changes, otherwise the returns to drying will be highly variable and implicitly reflect both quantity and market price changes.
In load averaging, grain brought in below the base moisture level offsets those brought in at higher moisture levels. Under this system producers have incentive to commingle higher moisture grain since elevators rarely offer a premium for grain delivered below base moisture content (MC) levels.
Equivalent bushel calculations at defined base moisture enable the separation of difference in quantity from price variability, i.e. remaining bushels, quality discounts, and drying charges can be specified.
While there has been increasing use of a shrink factor and a drying charge at mid-western elevators through the last decade, the predominant system still only adjusts negatively for grain with MC above the base. The producer still takes an implicit value discount for grain delivered at a MC below the base. The debate focuses on the quality problems that can ensue if the grain is too dry, i.e. increased breakage in corn and starch damage in wheat if it has been dried at too high a temperature.
Equivalent Bushel Concept (EBC) Pricing
Although the EBC is based on the quantity of dry matter in a load of grain, it differs from dry matter pricing. By using the base MC, the current price discovery system does not need to be changed. All contracts underlying the futures markets include a base MC, and the adjustment to value would be made to the quantity delivered rather than to the price. Furthermore, the EBC concept does not include any judgment about the quality delivered, and the elevators/processors requirements with respect to premia/discounts for quality factors would remain unchanged.
Table 1: Equivalent Bushels for Selected Moisture Contents (Assumes 1,000 bu. Beginning weight).
Export contract specifications for HRW and SRW for 1985-1995 indicates that for most of the period a moisture content of 13.5% was specified for SRW, whereas a distinct trend occurred in the number of contracts specified at 13.5% in HRW and to a much lesser extent for 13.0%. The average MC for SRW for the decade was 13.1% indicating that over half the total volume marketed domestically and exported received an implicit discount. More significantly, the average MC for HRW was 10.9%. While the specifications for export contracts is less defined for this wheat class, the trend indicates that a growing percent of export volume is being implicitly discounted.
Costs and Benefits of EBC to Market Participants
The greatest difference in value comes not between seller (producer) and buyer, but between producers who are delivering grain at different moisture levels. Those delivering below the base MC are being implicitly discounted, i.e. not receiving full value for the dry matter they are delivering compared with the producer delivering at the base MC. They are receiving the same market price per bushel, but the producer delivering at a lower MC is providing more equivalent bushels than the producer delivering at base MC (Table 1).
The EBC method dissociates payment for quantity from market price, thereby reducing the added price (revenue) variability that is implicitly included in the current system.
EBC will change the distribution of income among producers (sellers). This system would not change the structure of the market as it would not change the price discovery mechanisms already in place. However, the market channel is competitive and introduction of the EBC would make the value system more transparent. Possibly, buyers would change purchasing patterns based on the new information in the market.
In as much as producers who have the potential to harvest at a lower MC and receive value for doing so or have the capability to dry under controlled conditions and receive compensation for doing so. In addition, processors may introduce discounts to prevent overdrying, so there is a downside to harvesting or drying to the extreme.
In as much as MC has influence on certain attributes, i.e. breakage and starch damage, there can be positive and negative incentives resulting from adopting this system. In either case, the result is greater transparency and a more accurate incentive/disincentive in the economic signal.
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