By Matt Reese
With corn and soybean harvest season going strong, farmers are noticing much higher costs associated with deferred pricing (DP) grain at local elevators as they buy time for prices to increase. In northwest Ohio, monthly fees more than doubled at most grain elevators since last year.
“It’s country wide. We see a lot of elevators in Nebraska, Illinois and Indiana that have a drop charge somewhere as high as 25-cents a bushel and then a monthly rate that’s 10 cents or higher for DP. We just feel the effects more in northwest Ohio, I think, because last year’s DP rate was so low at six cents a bushel a month,” said Lisa Mitchell, grain merchandiser for Gerald Grain, based in Napoleon with locations throughout northwest Ohio. “Here at Gerald Grain, we have no drop charge this year and then we’re 15 cents a bushel a month — that’s pretty average right here in our little draw territory. There are some other commercial elevators who have a six-cent drop charge and then 12 cents a bushel a month. When you get into Indiana, usually the drop charge is higher and their monthly is lower, but for most elevators, if you figure the value of your space from harvest until the first part of January, it kind of all values out to be the same because of what we think basis appreciation is going to be from harvest until January.”
DP allows producers to deliver grain without establishing a price in the typically lower priced markets during harvest. Unlike storage, title to the grain passes to the buyer upon delivery with DP. The increased costs of DP for farmers in 2023 are due to several factors.
“Wheat harvest — that’s kind of where this story starts. At harvest, we saw elevators take in 20%, 30% or 40% more bushels than what they originally anticipated. A lot of truck houses in this area will take wheat in and then immediately turn around and sell it to a mill to make space for corn and bean harvest. We just didn’t see that this year. The wheat harvest was so big that we saw a lot of mills in northwest Ohio and southern Michigan, and eastern Indiana go no bid, so they essentially didn’t want any additional bushels. If you’re a typical elevator, you now have wheat in your space,” Mitchell said. “With the wheat harvest being bigger, you see bigger carries in Chicago. A few years ago, the Chicago Board of Trade changed how they value wheat space and we now have something called the VSR, the variable storage rate. That allows the wheat spread — the price difference between futures reference months — to get wider than what it was previously. There was not a lot of wheat that came into our facility on DP. Yields were good, prices were good, so we saw a lot of people take advantage of pricing wheat. When we buy wheat from the grower, we sell. A lot of that was done on July or September. Now you have to roll that wheat out to the next contract month because there’s not an end user that is willing to take that. And the spread, for example, today between December wheat futures and March wheat futures is 31 cents, but that’s what the Chicago Board of Trade is paying for a commercial elevator to essentially hold wheat from December until March. It’s 10 cents a bushel a month just to keep it, let alone any kind of other basis appreciation, interest costs something like that. So, when you have a commercial elevator that’s trying to value their space, wheat is a big piece. We took more of it and the Chicago Board of Trade is paying us to keep it.”
With corn and soybean prices falling in recent months, many growers are looking at DP opportunities this fall, putting a further strain on limited storage space.
“We don’t have a lot of ownership. Prices have continued to depreciate and growers have just stopped selling. If we continue to take in bushels and a lot of growers put it on DP because they think prices and basis will appreciate post-harvest, and we’re trying to stay open looking ahead to a potentially big corn and bean crop in Northwest Ohio, we might be at a point where we have more bushels on DP than what we own. Then we’re forced to essentially short our DP and we have to sell bushels to an end user at harvest time at a pretty low value, but we don’t own those bushels yet. Then in December and January when the elevator still doesn’t have a lot of ownership, but basis is continuing to appreciate because the end user has to get someone to move bushels to meet their demand, all of a sudden basis appreciates and the growers start to sell. If the elevator is trying to stay open for the grower during harvest and has already sold those bushels, we have the potential to lock in a loss by storing your DP if your DP rate doesn’t cover that.”
In addition, the spike in interest rates plays a role in the higher costs.
“If interest rates continue to appreciate, the elevator might have to hold on to those bushels longer because harvest is so big that affects how a commercial elevator looks at valuing their space in terms of what their DP rate should be,” Mitchell said.
Slow exports are another part of the equation. With all of these challenges in mind, DP may not be the best way for farmers to capitalize on higher prices this year.
“I don’t necessarily think we’re going to see any kind of appreciation in the futures market for corn and beans unless we start to see either our exports pick up or some kind of other demand increase. Due to the fact that the markets have sold off, it’s also created an opportunity for some growers to use options on bushels that they’re going to sell,” Mitchell said. “Because the prices are lower, option values are cheaper, so we’ve actually seen growers come out and sell grain across the scale or write up cash contracts and then use an option on top of that to try to provide some equity if the market should rally post-harvest. One thing with higher DP charges our growers have to remember is that the cost is accumulating every single day and working against them, so waiting on a futures rally this year could be problematic. Talk to whomever you sell your grain through and look for other options where you can at least capture where we’re at today just in case the market continues to erode.”