In general, the markets tend to trade sideways in February. And, with no big surprises in the February USDA report, everyone is looking to the March 31 report for market direction, which will estimate corn versus bean acres. Summer weather will then be the big market driver after March. For a $4.50+ corn rally, there will need to be big surprises in the March report. To reach $5, weather-related conditions are likely necessary this summer. On the bright side, it will be hard for the market to trade near $3, unless we get a bumper crop like 2014 again.
This month I worked with a client who was interested in putting up more storage. Currently, they were able to store 50% of their crop on the farm and they wanted to store 100%. To get financing, they asked me to help them show how storage was a good investment to their banker.
Depending on the size and manufacturer, the cost to build a bin is typically between $1.70 to $1.85 per bushel. With good credit many seven-year loans can be as low as 2% to as high as 5% (or 25 to 31 cents per bushel per year).
Bins built today dry corn much better than those built 40 years ago. On our farm, we can typically dry corn with 18 to 19% moisture to 15% only using fans (note, weather conditions may vary by region). This allows us to bypass elevator drying fees and shrink charges. As an example, in 2014 and 2013 we harvested grain at a 17% average (ranging – 16.5% to 18.5%). Without on-farm storage, the local elevator would have charged a 5.5-cent per point drying charge and put a 3% shrink penalty on the crop with 17%+ moisture (or a 1% real discount because 2% needed to be taken out for water weight regardless).
Another big benefit with home storage is the flexibility of where grain can be sold after harvest. For instance, our farm’s local coop has a nearby feed mill that pays a 6-cent premium year round for corn. However, during harvest, this opportunity isn’t available due to long lines and drying time delays. Additionally, there may be other opportunities throughout the country (e.g. an ethanol plant or large feed mill) that may not be as convenient to deliver to during harvest, but will pay a premium later during the year.
In providing the analysis for the banker, I assumed my client will price grain throughout the year before harvest, which provides the lowest risk approach to my client’s marketing plan. Once a farmer’s grain is priced on futures, opportunities to use carry and basis appreciation goes into effect.
Since this example shows a loan on building the bins, we should also show a loan on the grain that is sold on futures but not yet delivered. After all, if the farmer sold the grain at harvest that money could be used to pay down on the bin loan (or any operating note my client is carrying). Therefore, I’ll assume a 5% rate for that shorter-term type of loan. Over 10 months on $4 value corn that figures to about 1.6 cents per month in interest fees.
I try to account for every fee associated with home storage, including very small charges like loading and unloading fees and electricity to run the bin fans (these should be less than 5 cents total). Also, one could argue freight charges for hauling to the bin site, but the ability to unload with no line whenever you want in my mind cancels this charge out.
Following is a summary of the costs and savings on 17% average moisture corn stored on-farm:
- Drying charge savings $.11
- Shrink discount savings $.04
- Feed Mill Delivery premium $.06
- Market Carry $.30
- Basis Appreciation $.20
- Interest on grain -$.16
- Bin Payment -$.28
- Loading/Unloading and Fans -$.06
- Total Profit each year $.21 per bushel
If a farmer raises 200 bushels per acre, on-farm storage increases their profits by $40 per acre the first seven years (with a bin loan). After seven years, the profit would be about $100 per acre because there is no longer a bin payment. A 125-bushel per acre yield farmer could estimate $25 per acre profit the first seven years and nearly $60 per acre after the loan is paid off. Also, bins are low maintenance and can be used for many decades. Therefore, they are one of the best investments farmers can make, if they use proper marketing techniques.
Understanding how to use the market to increase profits with on-farm storage is something all farmers should be doing. Not only for the increased profits, but the significant reduction in farm operation risk. Many farmers are still falling into the trap of selling corn at a flat price after they have harvested the grain when they think the grain price is “right” or at a “high.” Unknown to many, this approach has more risk than the approach I advocate.
With tight margins facing farmers over the next couple of years (and likely into the future) it would benefit savvy farmers to learn to optimize their grain marketing strategy. Many farmers would be surprised to find all the potential profits trading this way provides them whether corn is at $3, $8 or anywhere between.
Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.
Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at email@example.com.