FARMER TO FARMER NETWORK
Home / Market Analysis / More grain bin economics

More grain bin economics

Holidays around the world caused trading to slow last week, which may be why the markets were up one day only to fall the next. The U.S. celebrated President’s Day on Monday. Carnival was Tuesday throughout South America. And, the Chinese Lunar New Year fell on Thursday and celebration continues into this week.

Brazil reports indicate farmers are 40% sold for 2015 (last year they were 60% sold). Lack of farmer selling is doing more to support prices than many in the trade thought. A U.S. planting intentions survey indicated that bean acres would increase to very high levels this year. However, it also indicated that 60% of farmers may change their mind at planting. Government forecasts indicate that corn and bean acres could be relatively close to 2014 acres.

It may be a wild ride between the March planting estimates and the June post-planting report. Now more than ever it’s important that farmers know their breakeven points and have profit goals. With these numbers farmers can develop market strategies that fit within acceptable perimeters while minimizing risk. Without a severe weather problem at this point it will be difficult for corn to rally above $5 and $11 for beans.

 

The benefits of storage (Part 2)

Midwest elevator managers say “typical” farmers in a “typical” year sell 50% of their crop before harvest. Also on average, farmers can store 50% of their crop at home. Usually, farmers deliver contracted bushels at harvest and leave unpriced grain stored at home.

To many farmers this makes sense at first glance. It’s also simple and easy to understand. However, this marketing plan leaves opportunity on the table.

In a previous column, I showed that a farmer who builds more storage can use basis and market carry to add 20 cents per bushel profit for the first seven years. After seven years when the bin is paid for, the profit jumps to 50 cents. Many farmers don’t realize that storing the bushels already contracted/sold and working the carry and basis is a smart move. Farmers don’t even have to change their marketing plan, they just need to add to it.

 

But what about shrink loss in my older bin?

Uneven drying is common in older bins. For instance, the top of the bin may be 15 to 16% moisture, while the bottom is 12% (averaging 13% across the bin). This would be a 2% shrink loss (derived from the market accepting 15% and only delivering 13%).

With $4 cash corn that is a cost of 8 cents. Therefore, I recommend using new bins, better at drying evenly, for wet grain at the beginning of the season and older bins for drier, end of the season grain. Done this way, the shrink factor should be less than 1% (or about a 4 cent loss).

 

I don’t want to store grain until summer are there any other options?

Interestingly, the elevator mangers say “typically” 50% of grain sold and delivered at harvest has delayed payment until after Jan. 1. Instead of doing this, in a typical year from October to January there is usually a carry of nearly 12 cents while basis increases of 5 to 10 cents are common. (Note, these are averages, for instance, this year basis was a 30 cent improvement plus 12 cents of carry.) Working carry and basis for just three months is on average a much better return than letting the end user hold your grain and money for free until Jan. 1.

 

Do you really price 100% of your farm’s grain marketed before harvest and store all of it?

Yes. While we take this marketing approach, I realize many farmers don’t do this. But, they should consider it. Even farmers that don’t price their grain before harvest can benefit from building more storage. Typical customer storage rates are 4 to 5 cents per month. On average farmers wait 3 to 5 months to price grain. That equates to a 20-cent premium average, which is good, but not the best use of the home storage. Money is being left on the table because market carry is not guaranteed and market price risk is still present.

 

Understanding your options

You may have noticed I never mentioned the actual grain price in these examples. These numbers show how grain bins (new or old) make and/or save farmers money regardless of grain prices. It’s important for farmers to fully realize all their options and opportunities for increased profits while they avoid leaving money on the table.

Farmers need to understand how the market is truly designed for them. Start educating yourself on how you can use it to your advantage. Progressive farmers are embracing new, more sophisticated marketing techniques and using them to make their farm operations more profitable, efficient, and all while reducing risk.

 

Check Also

Tough stretch for ethanol profitability

By Scott Irwin, Department of Agricultural and Consumer Economics, University of Illinois The U.S. ethanol …

One comment

  1. Very nice and informative article about the bin prices! This is very helpful especially for both residential and commercial waste proper disposal. Thank you.

Leave a Reply

Your email address will not be published. Required fields are marked *