As with many of my columns a discussion I caught this morning fueled my need to write. I'm finding as times get more "dire" so to speak, the more I see blanket advice packaged as expertise sold to the nation's farmers. As though those responsible for growing our food are not smart enough to understand return on investment, risk management or one of the myriads of obstacles he and she face on a daily basis.
Today's discussion centered around on farm storage and how unnecessary the author of this advice felt it was. To paraphrase the premise of the point was that unless you were your own end user (a feeder) or were using it strictly for convenience on farm storage was a waste and unnecessary. I don't know if I have seen anything further from the truth in my whole life.
I will say this though; if you aren't managing your on farm storage properly it is very possible you are throwing thousands of good dollars after bad. In those instances, yes, the bin has become an expense or a detriment to your profitability. As with any other tool in agriculture, if you aren't managing your risks properly you truly aren't receiving your maximum return on investment. So this week we're going to discuss on farm storage and what you need to do to ensure you are maximizing your return and benefiting from having that bin space on your farm.
In my opinion the most important factor needed to ensure your bins are paying for themselves is understanding your local market structure. In order to know whether or not it makes sense to store your grain-or how long you should look to store--you need to have a general understanding of the supply and demand economics that dictate your local bids.
The first thing you must ask yourself is who will be buying your grain. What is your local demand structure? If you know your beans go directly into an export market with little in the way of processor demand in your backyard understanding the influence of the South American crop on the global pipeline or how weather may impact your end user (ie: will frozen water ways limit demand once winter arrives?) will give you an idea of when market opportunities may arise or disappear. Is the bulk of your corn demand in the area ethanol based, rail or does it work its way into a feeder?
These are things you need to understand when analyzing your local market structure and what types of basis developments you might see in the crop year ahead. As with the futures market you will see ebbs and flows in market demand overall, but from a general standpoint historical pricing tendencies should remain apparent.
Of course just as you analyze your local demand set up you must also be aware of your local supply structure. Who is your competition when it comes to selling into the pipeline and how are they set up? Are you in an area with a heavy elevator presence or perhaps one with large on farm bin set ups sprinkled throughout the countryside?
With the recent heavy increase in bin space both commercially and on farm it is possible to see harvest vacuums develop-meaning the large amount of competition for grain at harvest has created a market set up that gives some of the best pricing opportunities right at harvest, or shortly thereafter, something once thought impossible. In these instances sometimes it makes more sense to ship as the market dictates versus holding the grain and trying to force it into an already plugged pipeline later in the year.
As with knowing your demand structure, having an idea of the local developments that may encourage or discourage movement will help you to better grasp when a good selling opportunity is presenting itself.
Nearly as important as understanding your local market structure is knowing how spreads impact your ability to hold grain. Last year we discussed figuring out your cost of carry and how just because you are holding your grain doesn't mean you're making money doing so. Holding your grain is not free, no matter how many guys want to argue with me over this fact. You have to factor in the cost of the bins, the cost of not having your money immediately at harvest, insurance, taxes etc. There is a cost associated with storing your grain and a formula to figure this cost.
To put it simply most elevators and accountants would agree that with current cheap interest rates and a couple other factors holding your grain costs you somewhere between 2 and 5 cents a month. This cost has to be covered in order to make storage a winning proposition for your farm.
As a result of this cost the market generally has carry built into it (especially in times of big supplies) to encourage you to hold the grain and keep it out of the pipeline until it is needed. The biggest fallacy when it comes to carry though is that there isn't a need to grab it when it presents itself, or that it will always be there. Soybeans have been great at showing how vital it is to capture carry when it presents itself over these past couple years, while in corn we saw what was over 25 cents worth of carry from the December 2015 futures month to the July 2016 nearly evaporate only offering 10-15 cents when it came time to roll out of December futures last November.
If you know you are going to hold your grain and you know carry is trading at historically wide levels capturing this spread when locking in your futures price, or taking advantage of it when it presents itself is a smart approach. The nice part about corn and beans is full commercial carry or a decent percentage of such (80% or so) is generally the widest the market will go, limiting any risk exposure you may be worried about. Wheat is not so nice, so for the sake of brevity let's focus on beans and corn.
If you figure it costs you 2-5 cents a month to store the grain and the market is offering you that or more in carry you need to lock it in. It is also important to remember that you are not guaranteed that carry until you take the steps to lock it in as well.
Meaning that just because you see 25 cents carry in the market from the December to the July when you lock in December hedges doesn't mean it will still be there when you want to roll those December hedges forward. In those instances if you see adequate carry in the market and know it is likely you will hold that grain into the summer months locking in the July futures makes more sense. You have pocketed that carry, if market structure changes you can always roll that sale back, but you can never get back carry once it disappears.
Be aware that spreads just as futures and basis are also a function of supply and demand and will fluctuate accordingly. A tight market structure tends to make for tight spreads (lacking carry) because the market is encouraging you to bring the grain to market versus holding it, while the opposite is true when we have plentiful supplies. Therefore understanding your costs associated with holding the grain and knowing what your rough plan is when it comes to shipping your supplies are vital when it comes to determining whether or not the market structure is telling you to hold the grain or bring it to market.
Finally, do not under any uncertain circumstances use the hold and pray method. Many times bins are treated as a Hail Mary option, meaning that if the sales weren't made throughout the growing year the new approach is to keep the grain to home hoping against all hope that the market will rally and cover the costs associated with storing. As I've said a thousand times before, hope is not a marketing strategy and this applies to your on farm storage as well.
Keep in mind having some grain unsold is entirely different than keeping all you can store unpriced-but leaving everything wide open because you have bins is an incredibly risky strategy and one that very rarely pays.
Using your bins to capture firming basis or carry is important, but having a plan to do so is vital. Know what you will need to move when it comes to space constraints and when. Ask yourself what your cash flow and quality needs are. Be sure to factor in coring your bins and having some grain move throughout the year for quality reasons as well as any problems with movement you may face (load restrictions, muddy driveways etc) when putting a plan together. Do not leave yourself at the mercy of the market when it comes to emptying bins and do not plan on rolling the dice or waiting until summer for movement if your cash flow needs tell you otherwise.
In the end using your bins to enhance your marketing by providing you convenience and allowing you to be in charge of your selling decisions will help you to capture the benefits to your farm they provide. Using them as a way to put off the necessary or avoid a market structure that is unlikely to change is dangerous and many times detrimental.
As with any tool in production agriculture they have their role and will provide countless services when used properly. Make sure to keep in mind what you are expecting to gain through your on farm set up and as with anything else do not expect them to provide magical services and you'll be fine.
For those of you without on farm storage all is not lost. There are plenty of ways to take advantage of market opportunities when they appear. As with anything else in the world nothing is all or nothing. What works for one may not work for another, embrace the tools available to you when it comes to making sales ahead of harvest and you'll also be fine.
As always don't hesitate to contact Pro Farmer or myself with any questions, we're here to help!
The views, opinions and positions expressed by the author are theirs alone and do not necessarily reflect the views, opinions or positions of Pro Farmer."