By Jon Scheve, Superior Feed Ingredients, LLC
With harvest in full swing, many farmers are asking me “which crop should I store if I am limited on space?”
What to store at harvest?
My farm operation has over 100% on-farm storage capacity, and I highly recommend most farmers should as well. Having 100% on-farm storage capacity not only simplifies harvest storage decisions and increases flexibility, but it also allows for more low-risk opportunities to maximize profit potential.
Despite the benefits, many farmers are still resistant to having more storage for a variety of reasons. Those farmers will need to analyze their own basis opportunities, market carry profitability and their operating note interest to determine what is more profitable for them to store at home. Following shows how I like to calculate each one.
Futures values do NOT matter when deciding which crop to store
This runs contrary to what many farmers think. Futures values should not be considered because one can always sell grain for cash and then immediately re-own futures in a brokerage account and maintain nearly the same market downside risk and/or upside potential. In other words, the risk is almost the same to have unpriced grain in a bin as having long futures position in a hedge account.
I know that some people will suggest re-ownership through options is a better way to do this, but that is a conversation about which risk management strategy is better. Both ways are trying to accomplish the same end goal of capturing upside potential in the futures market. That is NOT my focus with this article.
Consideration 1: Basis opportunity
Basis is the difference between the price on the board of trade and a local cash bid. Basis is constantly changing throughout the year, but historically it trends higher from harvest until summer.
For example, right now in the western Corn Belt, basis values for corn and beans are trading 30 cents higher than usual for this time of year, while corn is about 15 cents higher at most end users. So, how much could basis values in this area potentially rally harvest through June? With what we know today, it seems reasonable to estimate next spring’s basis values will be similar to the levels we saw last spring. Therefore, this would suggest the upside basis value potential for corn is higher than beans, so selling beans now over corn might be the better choice.
However, in the eastern Belt bean basis is not nearly as strong and it is more of toss up as to which crop farmers should store from a basis perspective alone.
Still, it is hard to predict where basis values will end up going. One reason is that freight is extremely tight right now and fuel costs are up substantially for every mode of transportation. This could continue to influence basis values and farmer’s options for where the grain can be moved after harvest.
Consideration 2: Market carry
Market carry is when the price of futures in the summer months are higher than the current month. However, market carry can only be collected if the futures values are already set but the basis and delivery dates are still open. If the grain does not have a futures sale against it, then market carry opportunity isn’t available, and this consideration should probably be skipped for determining which crop to store.
If a farmer has both crops priced, even on a small portion of their production, market carry for each crop should be considered. Currently corn’s market carry from the December contract to the March is 9 cents and 15 cents to the July. Beans have an 11 cent carry to the January contract, a 20 cent carry to the March, and a 34 cent carry to the July.
Since beans have more market carry opportunity, this suggest there is more profit potential right now to store beans over corn.
Consideration 3: Interest on an operating note
There is a cost to hold grain in storage, continuing to use the bank’s money, and not pay the operating loan off. It is calculated by taking the interest rate on the operation note against the cash value of grain being stored.
For example, with a one-year operating loan interest rate of 4%, multiplied by the cash values of each crop at harvest (let’s assume $5 for corn and $12 for beans), divided by 12 for a monthly rate and the cost per month to store corn is 1.66 cents per bushel while beans are 4 cents per bushel.
Since the cash value of beans is always significantly higher than corn, the interest cost to hold beans will always be higher and likely indicate corn is the better crop to be stored.
Other considerations: Income needs and bin capacity
Sometimes farmers also need end of year income to offset expenses. Again, since bean values are always higher, more income can be generated moving beans over corn.
Plus, corn weighs 56 pounds compared to beans weighing 60 pounds for the same bin space. This means bins can hold 7% more corn than beans, which could be a slight benefit for storing corn.
Farmers could also cut their beans and store them short term to speed up bean harvest, and then unload the bin soon after to store any remaining corn still standing in the field. This allows for double bin usage on farms with limited space.
Bean export timetable
Most beans are exported out of the U.S. during the winter, with the highest demand being October through January. Most corn exports happen after beans are gone, so logistically storing corn may mean more profit potential down the road.
Storing corn over beans
For those with limited space I usually suggest moving beans over corn. Interest costs alone usually outweigh the risk of upside basis potential, and it frees up 7% more bin space. Plus, most producers tell me it is easier sending trucks directly to the processor or elevator during bean harvest than managing logistics of long lines during corn harvest.
100% on-farm storage makes decisions easy
While we can outline what to analyze to help make the decision on what to store, there are still a lot of unknowns and unexpected market variables that will always make this a difficult decision. That’s why I recommend farmers have 100% on-farm storage capacity. It takes a lot of guesswork out of their grain marketing strategy and makes it easier to maximize a farm operation’s profit potential.
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.