Grain storage is a fact of life for the farmer. Your grain needs a roof over its head as you await delivery and pricing opportunities through the crop year. But grain storage is more than that. At times, storing grain on the farm is a smart marketing strategy, and it can pay off handsomely.
Even so, storing so you can hold out for the market peak can backfire. Once prices retreat, farm storage can not only be ineffective, it can be costly. In effect, you are the one paying the market to store, not the other way round.
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The decision to store or not depends upon a lot of factors. Changes in crop prices, basis patterns, interest rates and commercial storage charges all play a role. Yet storing grain on the farm is not often considered a marketing strategy. It is a necessity. Storage is a roof for the crop while you wait for the right opportunity to sell. When that right price doesn’t arrive, cash flow needs or bin space can force the selling decision. This is marketing by default and poor use of farm storage.
Profit potential from grain in storage depends upon the rise in prices and the change in basis. In a year of normal production, prices are seasonally lowest at harvest. Large supply and pressures on commercial handling and storage facilities conspire to force prices down. This is normally followed by a post-harvest rise in prices. Storing grain over a short term following harvest (three to four months) often provides an attractive profit.
A strengthening basis is another source of storage return. Local basis bids are seasonally weak at harvest. For instance, the canola basis in October usually hovers between $20 to $40 under the nearby November futures for elevator or crusher delivery. If storage helps you avoid cash delivery during a period of weak basis, it could easily earn you $10 to $20 per tonne on that score alone.
Always remember there are two key signals that the market will pay you to store: basis and price outlook. First, in a year of tightening spring supplies, spring basis levels tend to narrow. The buyer is encouraging you to drive up the elevator or crusher laneway. The country basis remains narrow until commercial sales are filled. Once sales are covered, basis levels may start to widen out. As the basis narrows (strengthens), you earn a storage income by storing grain. But a widening basis is a deterrent to farm storage particularly without a strong rally in the futures.
Second is the current price outlook. Spring bids can be the top price of the year, making it profitable to store through the winter. But in years when yields or quality are lower, fall bids can be your top prices, making long-term storage an unprofitable venture.
So, storing until either cash prices or basis bids strengthen in the short term can pay you a storage return, but it’s got to be managed. Even if prices fall, storing grain can improve your cash returns through better marketing. Hedging by selling futures contracts offsets the cost of grain in storage in a falling market. In a rising market, it is profitable to store without hedging or contracting.
Whether storing grain on-farm or in a commercial facility, there are seasonal periods of the year when prices might be pressured. These are periods when abundant grain and oilseed stocks flood the market forcing basis levels wider and prices lower. These periods include harvest plus the late-winter cash flow selling period. It’s during these times of year that local basis levels can widen. Commercial sales are covered, thus weakening basis levels and pressuring local bids lower.
But there is a cost to farm storage. The longer you wait to sell, the more expensive storage becomes. Only when there is a general price rise throughout the crop year does long-term storage pay. At times, it’s simply better to sell in the fall. Lost investment opportunity should be considered when making that key decision. Do you sell now or wait?
The cost of storing grain for a few extra months may not be worth the wait. Lost investment opportunity and bin depreciation can eat away at profit. Grain bin depreciation is shorter than its actual lifespan and storage is not a major cost for some operations. It varies from farm to farm.
So take a look at the pros and cons of farm storage. You have to weigh the cost benefit when deciding whether to expand your farm storage capacity. Grain storage allows you to avoid selling grain when prices are at a seasonal harvest low. You can avoid selling grain when basis levels are weak. Farm storage can help you avoid those waiting lines at the elevator. Plus storage may help manage income for tax purposes.
In reality, the biggest benefit of storage is, it allows you to take more control over your handling and marketing of grain.
Farm storage is a marketing tool. If managed, it will make you more money. If abused, it will eat up your profit. Watch the market outlook and basis so you know the difference.
Errol Anderson is the author of ProMarket Wire, a daily farm price management risk management report offered via email and fax. He can be reached at 403-275-5555, email: [email protected].
