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Don’t give your storage away

By Jon Scheve, Superior Feed Ingredients, LLC

The delayed and slow harvest progress has helped corn and bean prices by keeping basis levels higher than normal. A slow harvest also keeps futures prices from sliding because when sales across the scale are more gradual, there is less burden on logistics and end users can grind through more old crop before new crop is available.

Some end users are concerned there won’t be enough low-priced grain after harvest, so they’ve been aggressive with basis bids. End users know when harvest is complete and the bin doors are closed, it will take some coaxing to motivate farmers to sell.

Often farmers are too focused on cash prices and don’t pay enough attention to their storage expenses. However, if farmers want bigger premiums and profits, they need to think about grain marketing differently than conventional wisdom. This is especially true in years when grain prices are at or under breakeven points. The following illustrates a mistake many farmers make who do not have 100% on-farm storage capacity.

Many farmers make their first, and maybe only, sale before harvest for December delivery. December prices are usually a few cents higher than harvest delivery, and this allows farmers to capture some market carry premium while coring their bins during the winter. This might make sense for farmers with 100% on-farm storage, but for farmers who don’t have full storage on their farm, it is usually a mistake.

For example, let’s say that cash corn prices in May for harvest delivery were $4.25 while December delivery was $4.35. This meant there was a 10-cent market carry premium for farmers to hold their grain until after harvest for 2 months (i.e. 5 cents/month). Wanting to take advantage of this additional premium, a farmer could have sold some of the corn they planned to store at home for December delivery.

However, if corn is now under $3.90, that same farmer probably doesn’t want to sell corn off the combine for the lower price. Since this farmer doesn’t have 100% on-farm storage, they will have to pay storage fees at a commercial facility for around 5 cents/month waiting for prices to increase.

Put another way, this farmer will likely wipe away all market carry profits from the original trade on grain storage fees waiting for higher prices on the stored corn delivered at harvest in a commercial facility. If this farmer has to wait 6 months after harvest looking for a big rally, they would probably incur 30 cents in storage fees. In the end this farmer is 20 cents behind (i.e. 10 cent profit on the original market carry sale of stored bushels, less the 30-cent storage fee of un-priced grain in commercial storage).

For those farmers that don’t have 100% on-farm storage, it would have been better to make that first sale for harvest delivery and continue to make more harvest sales as desired. This approach allows for more flexibility and profit potential.

For example, many end users will allow farmers to move harvest delivery sales forward (later) in time, and probably will pay the farmer a premium to do so. That’s because the market pays a premium to hold grain in storage and not be paid right away for it (i.e. market carry) as well as basis usually increases after harvest. Since the end user hasn’t paid the farmer for their grain yet, and it’s harder to buy bushels after harvest than mid-harvest, it might be to the end user’s best interest to work with a farmer for a post-harvest delivery price premium.

While coring bins was part of the consideration with selling December originally, most farmers could wait until February or even March to do so, which provides another 2 to 3 months of free on-farm storage. This allows even more time for prices to rally on any un-priced grain and for farmers to take advantage of increased basis potential post-harvest.

Since most farmers don’t know when, where and how much grain should be moved at harvest, I recommend pairing storage planning and using futures sales instead of cash sales, because it allows me to keep marketing plans flexible. It’s difficult for farmers without 100% on-farm storage to estimate their storage needs before harvest, so making sales with futures instead of cash sales allows me to move grain any time of year (i.e. harvest, December, etc.). This flexibility helps when acres don’t get planted, yields are lower than usual, or record production means moving more unplanned grain at harvest than expected.

Often, farmers don’t know their exact production until the middle of harvest, and by then they can miss a lot of opportunities. That’s why planning and flexible marketing strategies can help to minimize farm operation risk and maximize profit potential.

 

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. 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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