How Does The Cooperative Grain Elevator Company Make Money?
Premier Cooperative is a grain elevator & fuel delivery business focused on providing customer service at the highest level for our patrons. Our patrons own the business, thus its title of a cooperative. By storing, drying, and selling their grain as well as purchasing their fuel through Premier, the company can retain fees for their services in several ways. The goal of this business model is that all patrons can pool their resources together to build facilities to reach markets that they may not be able to on their own, thus improving their price opportunities for the grain they produce. First, we’ll talk about the fuel side of our business and then move into the more complicated grain side.
Our Energy division is currently a liquid fuels business that services a large part of Central Illinois. This segment of our business buys fuel from a terminal and then resells to the end user for a higher price, thus collecting a “margin.” This total or gross margin is used to pay for our employee wages, delivery costs, and purchase/upkeep of our equipment. Our net margin would be the per gallon profit that we are able to keep after paying for all the expenses related to running our fuel business. Multiply the net margin by the total gallons of product sold and you are left with Profit that the company can use to grow.
Our Grain division can make money in several different ways, while the margins are much tighter, requiring more product to be handled than Energy. Grain is purchased from the farmer patrons and then sold to buyers across the area and throughout the world. We establish a Gross Merchandising Margin that we hope to capture but then have a large cost in getting that grain to market, being freight. Truck or rail freight is the expense we pay to ship grain, and it comes off our merchandising margin. Now, when the price of grain goes up after we purchase it from the farmer that does not mean that the company has gained. When purchasing this grain, the company looks to manage its risk by “hedging.” Hedging is a process of selling grain on the Chicago Board of Trade (CBOT) when buying from the farmer and then when selling, buying that same grain back on the CBOT while selling it to the processor or end user. At any given time, this hedge prevents the company from losing or gaining on the change in price on the CBOT but only gaining when basis improves. Basis is a complex topic but can be thought of as the item that Merchandising staff is looking for the best opportunities to maximize to profit from sales.
Other things that can affect this gross merchandising margin is discounts related to the moisture, damage, or foreign material on shipped grain. To avoid these expenses, we stress to our employees how important it is to keep good quality grain throughout the year. The other sources of margin are drying revenue and storage revenue, usually referred to as service charges. A farmer may deliver their grain at 20% moisture, and we then dry that grain to 15% and charge a fee for that service. If the price is not sufficient in the farmer’s eyes at that time, they may pay us storage fees until he feels as though the price is attractive enough.
Altogether, our gross margin for grain is merchandising margin and service charges. In a normal year at Premier, these gross margins may total 40 cents per bushel that we handle. Unfortunately, there are a large amount of expenses that reduce the gross margin to the net margin(profit). To run a grain company of this size requires utilities, buildings, employees, equipment, and other types of items. For Premier, these expenses currently total around 36-38 cents per bushel that we handle. That gives a final net margin of 2-4 cents per bushel, in a normal year. For every bushel that we handle, there is a very tight margin, thus we stress to our employees the importance of managing every expense possible as pennies matter.
It is our goal to provide a safe and enjoyable workplace while giving top quality service to our patron owners. At profit levels of just $1-2 Million per year, there is very little room for error throughout the 12-month process. At times, it may feel as though a company of this size should have deep pockets for bonuses/raises/events, but each year’s crop determines our success and ability. You might think, what can we do to change this equation? This is what we should all be focused on daily, to improve not only the experience for our farmers but also for our fellow employees.
Above all else, when you hear of a change or decision being made by a supervisor or manager, please give thought to how they are working their hardest to affect this equation as those decisions are not taken lightly and weigh heavy on the minds of those that make them. It is our collective goal to see Premier Cooperative continue to grow and succeed in a marketplace that does not allow much margin opportunities.
Examples of Ways to Save on Expense
Foreign Material – Avoid discounts by blending each load to max spec but not over (Math of discounts by destination)
Damage – Move cores early and often to ensure grain does not rot (Math of discounts by destination)
Over shipping transfers – Get grain to go to the eventual destination on the farmer’s trucks to avoid having to pay someone to transfer it
Re-elevating Grain – Each elevation costs the company in electricity, manpower, shrink, and FM. Avoid needless lifts and use
Electricity – Running fans only when beneficial to do so (Math of cost per hour per horsepower)
Labor – Seasonal labor can take the load off but is very expensive. Keep those positions limited
Fringe expenses – Be mindful of what is a need vs. a want