What Is a Terminal Elevator?
The term terminal elevator refers to a facility that is used to store and/or transport bulk agricultural commodities. In commodities trading, the physical delivery of the underlying asset of a futures contract is standardized by an exchange to be received at a particular location. This location is often called a terminal. This is especially true for grains and related agricultural commodities. There are several types of terminal elevators, including grain elevators and primary elevators.
- A terminal elevator is an agricultural commodities storage and transfer facility used to elevate large quantities of a commodity onto rail cars, ships, or trucks.
- Terminal elevators are most often located close to agricultural production sites where buyers and sellers of commodities meet to exchange physical products.
- Standardized futures contracts will specify which terminal elevator(s) are to be used for the physical delivery of a derivatives contract's underlying commodity.
- Grain elevators, primary elevators, process elevators, transfer elevators, and standard terminal elevators are some examples of terminal elevators.
- Basis trading is a strategy used by terminal elevators to exploit the difference between the cash (spot) and futures prices of an agricultural commodity.
Understanding Terminal Elevators
A terminal elevator is effectively a large pulley system that is used to transfer large amounts of grain to trucks, rail cars, barges, and ships for transport. The terminal elevator is the main link between farmers and consumers of the grain. As such, they are typically located close to areas where grain is produced and transportation hubs.
In general, they may be found in several locations, including:
- Distribution centers and areas with the greatest accumulation of a particular agricultural product. This allows for the transfer of the commodity to processors, such as flour mills, breweries, refineries, and distilleries. These locations are where the holders of futures contracts can pick up the underlying assets specified for physical delivery.
- Market centers, which have access to shipping facilities, such as railroads or shipping facilities on water. As such, they bring together major buyers and sellers and have the capacity to dry the grain, segregate grains of different qualities, and blend grains to meet the buyers' needs for the export or production of flour.
A terminal elevator performs three functions. It is a storage facility where grain is stored after harvest and before shipping to domestic and foreign points. The terminal elevator is a wholesale distributor. It conditions grain for storage to preserve its value.
An exchange must recognize a facility as a terminal elevator before it can be used for the purposes of trading.
Types of Terminal Elevators
There are several types of terminal elevators, including grain elevators, primary elevators, process elevators, transfer elevators, and standard terminal elevators.
- Primary elevators receive grain from farms for storage or forwarding
- Process elevators receive and store grain that will be used for manufacturing or processing
- Transfer elevators transfer inspected and weighed grain. Transfer elevators may clean, treat, and store grain
- Terminal elevators receive inspected and weighed grain
Because of the rise in genetically-modified (GMO) foods, there has been a need to construct new grain elevators and storage facilities.
Constructing new grain elevators to accommodate separate storage facilities for genetically-modified (GMO) and organic grains has become important in certain parts of the world—especially in countries where GMOs are not banned. This has become increasingly important to avoid mixing the two together in order to ensure that there is no cross-contamination and to maintain the integrity of organic produce.
Short the Basis vs. Long the Basis Trading Term Elevators
Basis trading is a strategy used by terminal elevators (as well as some agricultural producers) looking to take advantage of favorable basis differentials by exploiting the difference between the cash (spot) and futures prices of an agricultural commodity.
Terminal elevators buy and sell grain all year round. When elevators make commitments to buy corn from farmers on the local market, elevators will also sell futures close to the cash delivery date to hedge themselves. When elevators make commitments to sell corn to a buyer, they also buy futures with expiration dates close to the cash delivery date to hedge themselves.
Many areas around the country have times of the year when the basis is low and when the basis is high. If you understand your local market, there are times in the year when farmers and elevators may want to be long the basis (long cash, short futures) or short the basis (short cash, long futures). Basis traders look to be long the basis when their basis is low in their local market and they look to be short the basis when the basis is high in their local markets.
What Does a Terminal Elevator Do?
A terminal elevator is a facility that is used to hold and transport large quantities of commodities, especially agricultural ones like grains. The terminal is the actual storage facility while the elevator is used to transport the commodity. Terminal elevators are commonly used in commodity trading for the underlying assets of futures contracts.
What Are Some Types of Terminal Elevators?
Terminal elevators come in various forms. Among the most common is the grain elevator, which is used to hold and transport grains. A primary elevator holds or transports grains from farmers while process elevators store grains that are intended to be processed or manufactured. Another type of terminal elevator is called a transfer elevator, which transfers grain that is inspected and weighed.
Is a Grain Elevator a Terminal Elevator?
A grain elevator is a type of terminal elevator. It is used to hold and/or transport grains. This type of facility is commonly used in commodities trading to store the underlying asset of a futures contract. A grain elevator allows the commodity to be stored before the contract expires without the buyer taking a new position. As such, the grain can be delivered upon expiry.
The Bottom Line
Futures trading involves financial contracts between buyers and sellers who agree to the purchase and sale of underlying assets. These assets can come in any form, including commodities. Although most traders don't intend to take physical delivery of the commodity, it must be stored and transported in the event the buyer doesn't take another position. Terminal elevators are commonly used for this purpose.
Terminal elevators allow for the storage and transport of large quantities of grains and other commodities. In addition to being used for use in trading, these facilities are also used by farmers, agricultural companies, and manufacturers.