Costs and returns from holding grain

Where can corn and bean prices go from here?  Corn looks to be in a range of $3 to $4.40. The soybean range could be $8 to $10. Following are some of the market movers that could take prices higher or lower.

Reasons to be bullish corn:

• Too much rain — nitrogen losses will hurt yield, a possible repeat of 1993

• Root systems could be shallow and any adverse weather later in the season may hurt stand

• Acres for new crop may be reduced because of prevent plant

• U.S. dollar has not continued to rally, leads to being bullish exports

• Southeastern corn crop is dry and yields have been reduced.

Reasons to be bearish corn:

• Rain makes grain — 74% of corn belt is rated good to excellent

• Corn planted on time, shouldn’t be any reductions to planted acres

• Wheat crop has lots of quality issues, some wheat might be forced into feed channels displacing corn

• Carryout on 2014 is still burdensome

• Farmers running out of time to sell before new crop

• Several vessels of DDG cancelled to China

• Lack of new crop farmers selling could put pressure on any future rallies

• Lack of additional export sales could increase old crop carryout

• Bird flu may hurt feed sales by 50 million bushels, adding to carryout

• Green grass in the south could hurt feed usage and increase corn carryout

• Economic problems continue to plague Greece and the EU

• World stock levels are record high, which is burdensome.

Reasons to be bullish beans:

• 2014 Carryout continues to be reduced

• Crush margins for soymeal in the U.S. continue to be good

• Prevent plant acres could be high for bean crop

• Shorter season beans could reduce yields.

Reason to be bearish beans…

• Private acreage reports are still higher than USDA is predicting

• Even with prevent plant acres, it could still be a record planting year

• Even a yield reduction with record acreage could produce a larger carryout next year

• Carryout from 2014 is burdensome even at 300 million

• Carryout for 2015 was burdensome at 500 million, even a reduction to 300 million is the same as this year

•World stock levels are record high and burdensome.

Cost of holding grain

Last week I explained how I made a 92 cents premium holding my soybeans until June using basis and market carry. Some farmers may think the additional costs to do this type of trading isn’t worth their time. The following information shows the extra time and effort is definitely worth it.

“I can’t do it because of cash flow reasons.”

My response, “What is your relationship like with your banker?”  Once I explain my recommended marketing strategy to bankers, most are very supportive of what I’m trying to accomplish with my clients. In fact, many bankers later became my advocates for other farmers looking for marketing support. The first step is to make sure your banker understands what you are going to do and formulate a plan.

Next question: when does a farmer actually need money?

In November? Jan. 1 for tax reasons? After March 1 to pay rents? In July, when new crop input invoices start coming in?

Every farm’s cash needs and borrowing structure is different, which will need to be considered against the cost of holding grain. For instance, if a farmer doesn’t need cash right away, storing grain is an excellent way to invest money short-term. The grain bin becomes basically a short term CD.

However, some farmers may be in situations where they need to take a loan against the grain in the bin to meet cash needs. A loan for this amount is most likely less than 5% interest. If soybeans today are worth $10, it would cost 4 cents per month to store grain. As an example, if a farmer wants to postpone income until after Jan. 1, storing grain until June, the interest for 6 months is 24 cents.

“I don’t have on-farm bin storage.”

I strongly urge farmers to have 100% grain storage capacity on their farm.  While, overall farmers have increased on-farm storage in the past five years, many have not. I’m in year four of a seven-year loan on my bins. Currently, the bin payment is 21 cents per year. Farmers could expect payment terms on new bins to be slightly higher right now — about 25 to 28 cents per year. On-farm storage is arguably the best investment farmers can make right now.

“But, there are still costs associated to having those bins on the farm.”

Yes, filling the bins and running fans does cost a little, but it’s minimal.  On our farm we budget 5 cents.

“What about shrink?”

Some farmers argue they have 1% soybean shrink storing on-farm. However, our new bins have moisture-monitoring technology that has actually reversed any shrink factor from a loss to a small gain. In fact, even a .5% gain in moisture will offset the cost for loading the bins and running the fans.

Cost breakdown

Profit holding grain from harvest to June:            +92 cents

Interest holding grain Jan-Jun (6 months):              -24 cents

New bin cost:                                                      -26 cents

Total profits:                                                        +42 cents

Still think it’s not worth the extra effort?

With 42 cents of profit on 47 bushels per acre (national yield average), you can see nearly $20 per acre profit. On 500 soybean acres, a farmer would have received an additional $10,000 this year storing their beans instead of taking them to town at harvest.

What about corn?

Corn works similar to soybeans. This year we received a 60 cents basis and market carry premium (30 cents from each) on corn from harvest until June 1. The interest to hold corn is much less than beans because the value of the product is less ($4 per bushel corn at 5% interest will cost 1.66 cents per month). Holding the grain from Jan. 1 until June 30 will be 10 cents in interest.

Profit from holding grain from harvest to June:                            +60 cents

Cost of interest to hold the grain from January to June:                -10 cents

Cost of a new bin:                                                                      -26 cents

Total profits for this year:                                                           +24 cents

A farmer raising 500 corn acres at 170 bushels acre (national yield average) increases profits by $20,000. Even better, after the bin is paid off in seven years the profit doubles on corn. That’s $40,000.

Let’s recap that….

If a 1000+ corn/soybean (on even rotation) farmer built 100% storage on-farm and had incorporated a basis and market carry strategy into their grain marketing program, they could have increased their profits as much as $30,000.  Once the bins are paid off, that number jumps to $56,000 profit.

“How can this be right?  It probably only happened this last year, it won’t happen again.”

This isn’t magic. This isn’t fudging numbers. These are real numbers. Also, these kinds of profits are not isolated to this last year. Historically, these types of profits are typical.

This is why the big grain companies are getting bigger. This is why elevators put up bunkers in the fall. This is why ethanol plants are building more storage every year.

This is YOUR money, don’t give it to somebody else. Savvy farmers are locking in profits during the growing year and letting the market do the work for them, while average farmers are hoping for a rally after harvest. Learn how to take advantage of all your opportunities.

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.

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