Marketing grain in the bin can take a backseat to field work this time of year. However, given the current market, those with grain in storage need to be vigilant to changes in futures price, adjustments in basis, and accumulating storage expenses.
The goal for any farmer holding grain in storage should be to obtain a better price than the price offered for that grain at harvest. Additional revenue from storage is earned two ways
improvement in futures price and/or
improvement in basis.
However, in order for storage to be profitable these changes in price must exceed the costs of additional storage and interest expenses.
In this article, we examine the changes in futures price, basis, and accrued expenses for select locations across the state.
Corn
Futures prices have remained low and basis has remained weak for corn as the global corn market attempts to deal with large supplies. As an example, we will be looking at Merna in Custer County, the Nebraska county with the largest number of corn acres harvested in 2016.
In this example, we will assume a harvest date of Oct 3, 2016 and a storage cost of $0.04/bu/month charged on the first of each month. This storage rate is fairly common among commercial storage facilities in Nebraska.
Farmers with on-farm storage need to estimate their storage expense independently due to a wide range of factors influencing cost. Factors include the size of the bin, facility maintenance costs, drying, shrinkage, aeration, handling, and quality deterioration. (To estimate the cost of your on-farm storage, see this Iowa State University resource and related Excel spreadsheet.)
An important storage expense that must be accounted for is the interest expense accrued on an operating note (or any interest bearing account that may be paid back with receipts from grain sales or investment interest opportunities) while grain is held in storage. To calculate the interest expense per bushel, multiply the cash price at harvest by the annual interest rate of your operating note, then divide that total by twelve.
USDA AMS Market News Reports for Corn
Report TO-GR110 includes these locations for corn: Big Springs, Bridgeport, Broadwater, Brule, Chappell, Dalton, Dix, Gering, Gordon, Gurley, Hay Springs, Hemingford, Kimball, Lewellen, Lodgepole, Lyman, Oshkosh, Potter, and Sidney
Report TO-GR111 includes these locations for corn: Beatrice, Belgrade, Bloomfield, Columbus, Dorchester, Duncan, Elm Creek, Grand Island, Greenwood-Waverly, Hastings, Holdredge, Imperial, Kimball, Lexington, Manley, McCook, Merna, Murdock, Nebraska City, Ogallala-Brule, Osceola, Plymouth, Silver Creek, Stella, Superior, Tarnov, Wakefield , Wayne
The cash price for corn in Merna on Oct 3, 2016 was $3.01/bu. A 5% interest rate on the operating note for the $3.01 production costs would be $0.013/bu per month. Therefore, this producer is accumulating an additional $0.013/bu per month in interest costs for corn that was placed in the bin at harvest and is currently unpriced. On a per bushel basis this expense does not seem like much, but on 100,000 bushels, that adds up to $1,300 every month.
Table 1 tracks futures prices and basis movements since Oct 3, 2016 for Merna. It also illustrates the value of estimating storage and interest expense when storing and selling grain out of the bin. There have been limited opportunities, under these assumptions, for corn producers to sell corn above the Oct. 3, 2016 price using a cash contract for nearby closing futures price. Of these limited opportunities, many of them came later in October prior to the accumulation of additional interest and storage expenses. Farmers may have obtained a higher price than the assumed cash price at harvest by using more complex pricing strategies.
Farmers who harvested corn later in the season can find those cash prices by searching the USDA AMS Market News Report.
A similar process is used to determine post-harvest price targets for soybeans. In this case we use Waverly in Lancaster County, Nebraska and a cash price for soybean on Oct 3, 2016 of $9.60/bu. In this case, we will increase the storage cost to $0.05/bu/month. If a producer has a 5% interest rate, the interest cost per bushel per month is $0.04 for soybeans.
Despite the higher per bushel storage and interest expenses, 2016 stored soybeans have had several pricing points above the harvest price. Table 2 shows futures and basis movements since Oct. 3, 2016 in Waverly.
Usually, about 30% of the US corn crop and about 19% of US soybeans are sold from April to August. Farmers holding grain in storage expect price increases in the market as a result of adverse weather conditions for planting and crop development or from changes in demand. The hope is that storing grain until the spring or early summer will result in an increase in the futures price that will offset any weakening of basis, and accrued storage and interest expense.
Furthermore, additional considerations may need to be taken into account when deciding when to store and sell grain, including
cash flow needs,
truck availability, and
grain quality.
These additional factors may have costs or benefits that outweigh the monetary incentives to store or sell grain.
The forgoing scenarios assume that the farmer only uses cash sales. Marketing strategies using more complex marketing contracts that mitigate adverse changes in futures price or basis are available. Many elevators offer these more advanced contracts. Talk with your local grain merchandiser about these opportunities. The more you know the more likely you are to capture better prices somewhere during the year.
Farmers who store grain for futures sales need to establish and understand expected basis and it trends, and calculate and know their individual storage expenses and interest costs in order to effectively use this tool to maintain the best profitability possible and to help mitigate risk. A general rule of thumb when selling corn and soybeans out of the bin is that pricing grain should be complete by July 1, when prices of both commodities usually decline in anticipation of the coming harvest.
