By Jon Scheve, Superior Feed Ingredients, LLC
Once again “free” storage is being advertised throughout the corn belt. While some also call it “price later opportunities,” “delayed pricing” or “DP” it refers to when farmers sign over their grain to an end user or commercial facility, and then wait to price the grain later, hopefully at higher values.
On the surface, “free” storage seems like a win-win for farmers and end users or buyers. These “free” storage programs are a great way for end users to procure grain supply during the winter. And farmers can move their grain now when they are not busy, and price later during a potential rally. Unfortunately, “free” storage ends up costing ALL farmers, those using it and those that do not.
Why does “free” storage hurt all farmers?
When end users offer this program, it is usually because they are having difficulty procuring enough grain to meet their immediate needs. Typically, “free” storage offerings spur a rush of quick ship grain and helps end users get through a month or two of difficult origination. However, this ultimately keeps basis prices artificially lower than the bids end users should be willing to pay for grain right now. In other words, why would end users push their basis bids up when they are getting plenty of grain delivered?
How much are prices impacted?
Basis level suppression from “free” storage could be 10-20 cents in an average year, but it might run higher depending on local conditions. For example, two years ago there were production issues in central Missouri and North Dakota, and basis values after harvest in those areas were 50 cents higher than normal. Similarly, in the previous year the southwestern part of the corn belt experienced a lot of dry weather, and basis values there were $1 per bushel higher than normal.
Why do basis levels fluctuate so much?
Basis usually goes up when farmers quit selling because they either run out of grain to sell or they think prices will go higher and hold their grain. Therefore, end users need to incentivize grain movement and sales to their facility by increasing basis. Conversely, end users will then decrease basis bids when there is plenty of supply available.
This means when farmers are not using “free” storage programs, end users need to increase basis values to entice farmers or commercial facilities to move grain. Those higher bids mean increased prices for ALL farmers in that area and potentially the surrounding areas.
But “free” storage offers several conveniences to farmers
True, some farmers argue that with “free” storage they do not have to worry about their grain’s condition in the bin or when to move it. Plus, they get the flexibility of being able to sell at potentially higher prices down the road.
Again, these conveniences seem good on the surface, but the farmer has limited their pricing opportunities. These farmers are now committed to the prices the end user is offering, and that usually means current month basis bids that run at lower values than forward bids. This “forced” discounted price is part of the cost for the “free” storage.
Another problem with “free” storage is that when farmers place a sell order on their “free” stored grain, it is usually for a cash price sale. This allows end users to know the price many farmers are willing to sell at, because they can see all the pricing orders that are placed. If many farmers pick the same general price point to sell, end users can fade their basis bids back as that cash price point approaches. This basis fade may only be 2-5 cents, but the “free” storage program just cost farmers in that area a little more money.
Just a few farmers using “free” storage hurts all farmers
It only takes about 20% of farmers in an area to commit 50% of their production to “free” storage for end users to procure about a month’s worth of needed production. This can bridge end users until the next round of farmer selling, often right before planting season, and suppress prices for all farmers locally. Plus, these lower basis values can trickle beyond the surrounding area and impact farmers in markets further away.
Nothing is ever “free”
In grain marketing there seems to always be hidden costs. And, for “free” storage programs the hidden costs hurt ALL farmers not just the ones that participate.
So, encourage your neighbors to not use “free” storage. Following is a list of what to mention:
- End users likely offer it because it is beneficial to them, not the farmer
- No end user would offer something for free if it did not profit them in some way
- “Free” storage users likely contribute not only to price suppression for themselves, but all farmers in the area
- Using “free” storage means a farmer will likely be locked into using an end user who knows what price farmers are willing to sell their grain, and could artificially lower prices
- The minor conveniences come at likely a huge cost to both them and YOU
Remember only YOU can prevent the spread of “free” storage.
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, Neb. 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.