Storage added over 70 cents to bottom line this year

By Jon Scheve, Superior Feed Ingredients, LLC

It looks like most corn throughout the U.S. will get planted by the end of May, or the first week of June. So, a repeat of 2019 seems unlikely. The northern Corn Belt was a concern, but producers there are now telling me they should be done within a few days or by next weekend.

There are pockets between I-70 and I-80 from Nebraska to Ohio that are delayed but should get planted within the next 2-3 weeks. The biggest delays are happening in Northeast Indiana and Northwest Ohio, where farmers have still been unable to start planting.

While this later planting pace increases the chance of below trendline yields, it is not a guarantee. In other years, planting pace has been this slow, but good summer weather still led to trendline yields. Basically, the weather in July will still determine what the final corn yield will ultimately be.

Why storage pays

I’ve gotten several questions from farmers on the process I used for when and why I set basis on my farm. For background, in 2023 I bought puts on much of my anticipated production. I also had some sales on and several options trades that gave me added profit. My final futures value ended up as $5.54 against the December contract. This floor price was mostly set and secured by February 14 of 2023 as this chart shows:

That may all seem like a lot of work. A farmer asked me why do all the work to hold grain after harvest if my floor value was $5.54 and futures at harvest were under $5?

The reason is that basis at harvest in southeast Nebraska picked up on my farm was trading -35 cents to the futures values as the chart below for October shipment shows:

That means, if I had sold my corn to be picked up at harvest, I would have received $5.19 cash value ($5.54 futures – .35 basis value).

Usually, the worst basis of the year is during harvest in October because many farmers don’t have enough home storage and need to move their grain to commercial facilities where space is limited. In my area -35 is common at harvest time. However, once harvest is over, it is very difficult for end users to get farmers interested in moving grain, especially if futures values are low. As the chart above shows, shortly after harvest was over end users increased their basis bids to incentivize bushels to move.

Which month do you sell futures in?

Another farmer asked me if I make my sales against the December contract and then roll them forward to a future month. Or do I just pick the month I plan to sell grain in when I make my original sales.

Usually, I will pick the December contract because the spread to the other months historically works in my favor as the year progresses. However, some years market conditions will suggest that I should place the trades in the contract months I plan to move the grain earlier in the year.

Just like how futures and basis have their own market movements, so do the spreads. In some years, spreads will be widest in the spring and others it is in the fall. Last year, I waited until late fall and captured 37 cents of premium to store grain waiting for basis opportunities as shown in the chart below:

What about the cost of money?

A question that I receive frequently is if I account for the added interest to store my corn that long. The answer depends on what I’m comparing my sales to. If someone wants to look at holding unpriced grain in the bin until the day I set basis, then both trades have the same amount of interest costs in them and it’s not relevant.

However, if I’m comparing my sales and storage price to someone who did not store their grain at harvest then it’s extremely important to look at the cost of interest to store grain.

In October, the futures value for corn was around a $4.95 average and the basis was trading at -35. This means the corn in my bin has a $4.60 cash value. To calculate the interest cost to hold the grain, I take the $4.60 cash value of corn x 9% interest for a short-term operating note divided by 12 months to arrive at a 3.45 cent per month cost for storing grain instead of selling at harvest and lifting my hedges.

That means storing my corn in the bin for 7 months until May, instead of selling at harvest, will cost me 24.15 cents (3.45 cents x 7 months).

Why do you use the $4.60 cash price and not $5.19?

The reason I use the current cash value is because my hedge account will have already captured some of the profit from the drop in futures prices from $5.54 futures I have sold to $4.95 where they were trading. I can take that profit out of the hedge account if I want and pay down any short-term loans I have. Also, by using cash it accounts for where basis values are and where I believe they might go as well.

What was the outcome?

In October, the spread as noted in the chart above, to move my sales from December to May was paying me 24 cents, which would have covered almost all my interest cost. However, I suspected the spread could move wider, considering the large harvest the U.S. was having, so I waited until late November to move my sales from the December contract to the May contract. My hunch turned out to be correct, and I pocketed 37 cents to hold the grain until May, which more than covered the 24.15 cent interest cost to store the grain.

Basically, through market carry I am paid the equivalent of a 13.5% annualized return (37 cents / 7 months = 5.2 cents x 12 months = 63 cents / $4.60 = 13.5%). This means even with a 9% loan I made a 4.5% annualized profit using the bank’s money. And the bank was happy about making the loan. It was a win-win scenario for both of us.

I have heard that some people suggested that for those who didn’t have to borrow money, it would have been better to sell the grain at harvest and put that money into a CD for 5% interest. Clearly making 13.5% is significantly better than 5%.

Plus, these calculations don’t even include the basis appreciation profit from harvest to April. I made another 35 cents in profit from that portion of the trade, which is the equivalent of another 13% of annualized return.

In total, I collected 37 cents in market carry and 35 cents of basis appreciation for a total of 72 cents over 7 months. If I didn’t have a bin payment or operating note, it means I made the equivalent of a 26% annualized return on my investment over 7 months. And for the farmer who does have operating notes and bin payments the market would have paid for both this year.

Farmers can make a lot of additional profit through on-farm storage if they understand how the market encourages them to do so. With current corn prices where they are, it is more important than ever that farmers take advantage of these kinds of opportunities that can help them maximize their profit potential.

If you want to learn more about how to use on-farm storage to turn profits like this, reach out to me.

Please email jon@superiorfeed.com 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.

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