You can fill the bin, but can you empty it?
Farmers in coffee shops often discuss yield as a way of measuring their success. However, full bins do not equate to the highest revenue. With planting finally getting started, the real question is, can you empty the bin? Grain sitting in the bin once equipment hits the field is often forgotten until late summer. Forgotten grain may result in a lower price per bushel than was available at harvest, nullifying the logic of placing it in the bin to begin with.
Spring is a busy time for everyone. Nevertheless, planting is often a prime time to empty the bin and capture higher prices. Farmers wanting to unload their bins and obtain higher prices need to do three things.
- Keep their finger on the pulse of the futures market.
- Watch for changes in local basis.
- Know their accumulating monthly expenses.
The proverbial “spring price rally” has finally arrived as corn and soybean prices show a strong upward trend. The futures price of corn has improved almost $0.60/bu from September 1 to May 1. Soybeans have improved $1.00/bu over that same period. Two primary drivers, planting conditions and reductions in available grain, bring on this annual increase in prices.
Planting Conditions. Planting of the 2018 crop got off to a slow start, but caught up i the last week. The most recent USDA Crop Progress report (ending the week of May 6) shows 42% of Nebraska corn is planted, near the 46% reported last year and for the five-year average. Soybeans are ahead of normal with 16% in the ground, compared to 12% last year and for the five-year average. Uncertainty about the 2018 crop during planting will support prices for the old crop sitting in the bin. Issues with planting may drive prices higher, if only for a moment, providing opportunities for farmers to capture higher prices.
Reductions in Available Grain. The USDA Economic Research Service estimates that approximately 75% of the 2017 U.S. corn was sold by farmers to grain buyers (elevators, feed yards, and ethanol facilities) from September 2017 through April 2018. The remaining 25% is expected to be sold from May through August. Similarly, it's estimated that 87% of U.S. soybeans were sold from September through April. With the bulk of these commodities sold, smaller available supplies will push up the price until quality and quantity expectations are more apparent for the 2018 crop.
Cash Price = Futures Price + Basis or
Basis = Cash Price – Futures Price
View historical basis patterns for Nebraska towns at go.unl.edu/basis
The futures market is only one component of the cash price of grain. The other component is basis (see box). On May 1 Nebraska corn basis ranged from -$0.37 to -$0.65, while soybean basis ranged from -$0.85 to -$1.28. Although basis differs greatly across the state, at a single location it may only change a few cents per week.
Although basis changes are not as volatile or as rapid the futures price, farmers should track the basis of local grain buyers. Buyers will sometimes improve their basis to entice farmers to sell, adding more revenue to farmer’s pockets.
The final consideration should be mounting interest and storage expenses. Depending on your financial situation, these expenses can play a significant role in selling grain out of the bin.
Storage expenses are often the hidden villain of storing grain too long as gains in price may be offset by accumulated storage expense. For example, if a farmer has a commercial cost of storage of $0.04/bu/month and this fee has been charged on the first of each month since Nov. 1, 2017, the farmer has already accrued $0.24/bu in storage expenses (as of May 1, 2018) for the 2017 crop. Farmers with commercial storage need to know the details of their commercial storage fees. Each grain buyer has different fee structures.
On-farm storage expenses are often lower than the commercial rate, but on-farm storage is not free. Farmers with on-farm storage are paying for repairs, depreciation, taxes, and insurance on the bins. These costs can be two-thirds to three-fourths of the commercial rate and should be recuperated from the sale of grain.
If you are operating on a line of credit, the longer you hold grain in the bin, the more interest expense you are accruing. An additional cost is any accumulation of interest expense 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.
Harvest Cash Price x Operating Interest Rate)/12 Months = Interest Cost/Bu/Month
That is, if the Nov. 1, 2017 cash price at Kimball was $3.19 and the annual operating note interest rate was 5%, the interest cost would be calculated as
($3.19 x 0.05)/12=$0.013/bu/month
Additional considerations for timing sales include cash flow needs, truck availability, and grain quality.
Developing a Written Grain Marketing Plan
The best way to keep track of futures, basis, and accumulating expenses is to have a written grain marketing plan. For help in creating one, see these CropWatch articles: