Storage and freight costs

By Jon Scheve, Superior Feed Ingredients, LLC

Hot and dry weather is expected for the next week or two, but forecasts vary on how dry August will be. Any weather shift could shake up the market.

Debates continue if the areas where crops look great can make up for the northwest Corn Belt’s reduced yields due to persistent hot and dry weather. The market still has a premium price in place, if overall trendline yields are produced.

Some parts of China received 30 inches of rain over 2 days, but so far, it is unlikely to affect total production much as the corn grown in those flooded areas is not that significant. A concern might be that nearly 1 million hogs and chickens might have been lost in the region which could hurt demand.

Brazil has been battling a drought for several months and now some areas have had frost. Therefore, yields are trending lower, and Brazil is buying some corn from Argentina. Many market traders believe this will lead to more upcoming global demand for the U.S. corn supply and will keep prices supported longer term.

Questions from readers

Recently I’ve received some great questions from readers. Read on for those questions and my answers.

 You say you store your grain longer than one year, but what about shrink and other costs to keep your grain in good condition? I’m not sure an extra 10-cents is worth the risk.

This is a great question. For background, we increased our on-farm storage capacity so we could hold our grain longer than one year and maximize our profit potential capturing market carry and looking for basis opportunities. 

On our farm in southeast Nebraska, maintaining our corn in good condition for over a year requires minimal attention and expense. We run the fans a few nights in November to ensure the grain temperature is lowered evenly back down into the 30s. This keeps the grain in good condition through the following spring, and usually costs us less than 1-cent per bushel in power. One summer our grain’s temperature went above 50 degrees, which invited bugs, so it had to be treated. While disappointing, this ended up costing us only 2 cents per bushel that one year.

Early on, shrink was a concern. However, we have managed to average around 15% moisture levels when unloading the bins by blending overly dry corn from the previous year with new crop corn harvested at higher moisture levels. This strategy also helps us minimize dry down costs on the new crop too, so it is a win-win.

In the end, our shrink and condition costs average only 1-2 cents per bushel per year on the corn we hold over. This minor cost can usually be offset by market carry premium and increased basis profit potential post new crop harvest. This year I only made 10 cents because the market was in an inverse after February, which rarely happens. Usually, my profit potential opportunity in carry markets is significantly higher. 

How do you figure your freight rates costs?

Evaluating freight rates varies by farm. Some farmers have fixed labor costs that need to be paid out all year long regardless of if that labor is hauling grain or doing nothing else. Some farmers, due to other commitments, may not have enough time to load trucks or move grain at any time during the marketing year that they want. These are all valid concerns and need to be considered to determine what’s best for each farm. Following summarizes how we evaluate freight costs for our farm.

First, we need to determine the cost to haul the grain to any local destination. I get bids from several local trucking companies to determine the market rate for hauling my grain commercially to each location.

I have evaluated the hauling costs for many farm operations across the country and overall, I have found that equipment depreciation, repair, fuel consumption and labor costs are very similar from farm to farm. Typically, it is inefficient for farmers to haul their own grain more than 50 miles in one direction, because commercial haulers can usually find a load to haul back, which can offset the transport costs.

Conversely, a 10-mile round trip is usually more efficient for farmers to do themselves because of the limited road expenses on the truck and labor time involved with a short turnaround time.

Next, I check with multiple companies specializing in trading grain throughout the U.S. who will find and cover the freight costs when buying my grain for on-farm pick up. Usually, these companies find the most efficient commercial haulers to pick up the grain on my farm for distances greater than 30 miles. These grain companies help the market work at peak efficiency. 

Finally, we compare all bids locally back to an on-farm pick up price, so all bids are on equal footing.

You mentioned hauling your 2020 corn 500 miles. What was your freight cost?

I’m not sure, because the buyer arranged their own truck to haul it. The trucking company had a backhaul load near that destination, and because the grain company traded grain in different parts of the country, they could figure a price spread that enabled this load to travel so far from my farm. This is a great illustration of how efficient the market really is. 

Each farmer needs to determine the true freight costs off their farm. For me, hiring outside trucks to haul grain provides me more flexibility on the timing of my sales. This is extremely valuable because usually the best basis bids are for when farmers are the busiest and labor is stretched thinnest, like during the planting and spraying season. Like most farmers, I am always looking for ways to be more efficient and improve the price I receive for my grain. Maximizing freight efficiencies is just another tool I use to increase my profit potential within my entire marketing strategy. 

Please email jon@superiorfeed.com 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.

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