What Is a Terminal Elevator?
A terminal elevator is a location for the bulk physical transfer of agricultural commodities. In commodities trading, physical delivery of a futures contract's underlying asset will be standardized by an exchange to be received at a particular location, often called a terminal. This is especially the case for grains and related agricultural commodities.
- 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 product.
- Standardized futures contracts will specify which particular terminal elevator(s) are to be utilized for the physical delivery of a derivatives contract's underlying commodity.
- There are several types of terminal elevators, including grain elevators, primary elevators, process elevators, transfer elevators, and standard 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 a Terminal Elevator
A terminal elevator is effectively a large pulley system, typically found at distribution centers, that is used to transfer large amounts of grain to trucks, rail cars, barges, and ships for transport. The terminal elevator is typically located in areas that have the greatest accumulation of the particular agricultural product, in order to transfer the commodity to one of its processors, such as flour mills, breweries, refineries, and distilleries. These locations are where the holders of futures contracts can pick up their underlying assets specified for physical delivery.
Terminal elevators tend to be located in market centers that have access to ship facilities, such as railroads or shipping facilities on water. 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 export or production of flour. Before a terminal elevator can be used, an exchange must recognize the facility as a terminal elevator.
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 also a wholesale distributor. In addition, the terminal elevator conditions grain for storing to preserve its value. The terminal elevator is the main link between farmers and consumers of the grain. As such, they are typically located close to grain production areas and transportation hubs.
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.
Grain elevators are grappling with the recent need for separate storage facilities for genetically-modified (GMO) and ordinary grains to avoid mixing the two.
Elevators Used in "Short the Basis vs. Long the Basis" Trading
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 where 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.