By Jon Scheve, Superior Feed Ingredients, LLC
On Monday the USDA will release the stocks report and tell us how much grain is still in the bins. In 7 of the last 14 years the stocks for corn were higher than estimates. The good news is that it has only happened 1 out of the last 4 years. The problem is that when the stocks are higher for corn than the estimates they tend to be pretty far off. When the stocks report is smaller than estimates the difference is usually quite small.
The bean stocks report has been erratic and hard to predict. However, with the already large carryout any change up or down is probably not as important as what the yields start to look like as harvest begins this upcoming week.
There is snow in Montana and it could work its way east. There are forecasts for cool weather working into the Dakota’s and western Minnesota over the next several days. Farmers in these areas were hoping that it would not freeze until nearly Oct. 1. So, it seems as though most of the corn and beans in these areas will make it to maturity.
Should I pay commercial storage?
Last week I discussed which crop farmers should store at home, if they don’t have 100% on-farm storage. The next storage questions I’m frequently asked are….
What do I do with my grain in a commercial facility? Do I sell across the scale or pay storage?
There are three factors to consider:
- How much does the commercial facility charge to store grain at harvest?
- What is the current basis level and how much higher could it go at that facility?
- How much is the interest on the grain stored at the facility?
Why aren’t futures prices on the list?
Many farmers choose to store unpriced grain commercially because they think prices will go higher later and they want to sell at higher values. However, in reality futures values don’t matter when deciding if someone should pay for commercial storage. If the farmer doesn’t like the current futures prices, they can buy the futures back in a hedge/brokerage account when they sell the cash grain in the commercial storage facility. Their risk exposure is basically the same as having unpriced grain in storage.
(Note, there are many different ways to re-own grain. The purpose of this newsletter is not to discuss those strategies but instead look at the decision of paying commercial storage or not.)
How much does the facility charge?
Storage costs are probably the most important part of the decision to store commercially. As harvest beings some end users have minimum charges while others have dumping charges included with storage fees for a specific amount of time. While costs vary, I’ve found typically storage fees average 5 cents per bushel per month for corn and beans.
Why basis matters
The difference between basis levels at harvest and where they will likely go is the second most important part of the storage decision. Historically basis values increase 30 to 40 cents on average from harvest to the following spring or summer for both corn and beans. The following shows basis levels near my farm for both crops.
Generally speaking, what I have found is that corn basis values increase 4 to 5 cents per month from harvest to late spring or summer, which is slightly less than paying the average monthly storage cost at a commercial facility. Bean basis values increase slower with the higher basis value being seen in late summer. This means that usually beans will only increase 3 to 4 cents per month on average.
Loan interest also needs to be considered
Leaving grain in storage means farmers won’t get paid for the grain while waiting for higher prices and their operating note will continue to collect interest. This monthly cost is figured by multiplying the grain’s cash value and operating note interest rate and dividing by 12 months. If cash corn is $3.50 and my operating note is 5.5% interest, it costs 1.6 cents per month to store the corn. If cash beans are $8.25 and my operating note is 5.5% interest, it costs 3.75 cents per month to store the beans.
Why I don’t think storing grain commercially is a wise decision
On average storing unpriced corn costs about 6.6 cents per month. While storing beans commercially is likely to be closer to 8.75 cents per month.
If we assume average monthly basis value increase of 4 to 5 cents for corn and 3 to 4 cents for beans, paying to store grain at a commercial facility doesn’t make financial sense.
If farmers have unpriced grain at harvest and can’t store it on the farm, the better solution would seem to be sell the grain at harvest and consider some type of a re-ownership plan to participate in a futures rally.
Please email firstname.lastname@example.org with any questions or to learn more. 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.