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This Week’s Market Forecast from Minnesota Jon…

Jon Scheve
Jon Scheve

 

 

 

 

Market Commentary for 2/13/15

 

In general, the markets tend to trade sideways in February.  And, with no big surprises in the Feb USDA report, everyone is looking to the March 31st  report for market direction, which will estimate corn versus bean acres. Summer weather will then be the big market driver after March.  For a $4.50+ corn rally, there will need to be big surprises in the March report.  To reach $5, weather-related conditions are likely necessary this summer. On the bright side, it will be hard for the market to trade near $3, unless we get a bumper crop like 2014 again.  

 

Storage

This month I worked with a client who was interested in putting up more storage. Currently, they were able to store 50% of their crop on the farm and they wanted to store 100%.  To get financing, they asked me to help them show how storage was a good investment to their banker.

 

Depending on the size and manufacturer, the cost to build a bin is typically between $1.70-$1.85 per bushel.  With good credit many 7-year loans can be as low as 2% to as high as 5% (or 25-31 cents per bushel per year). 

 

Bins built today dry corn much better than those built 40 years ago.  On our farm, we can typically dry corn with 18-19% moisture to 15% only using fans (note, weather conditions may vary by region).  This allows us to bypass elevator drying fees and shrink charges.  As an example, in 2014 and 2013 we harvested grain at a 17% average (ranging – 16.5%-18.5%).  Without on-farm storage, the local elevator would have charged a 5.5 cent per point drying charge. AND, a 3% shrink penalty on the crop with 17%+ moisture (or a 1% real discount because 2% needed to be taken out for water weight regardless).

 

Another big benefit with home storage is the flexibility of where grain can be sold after harvest.  For instance, our farm’s local coop has a nearby feed mill that pays a 6 cent premium year round for corn.  However, during harvest this opportunity isn’t available due to long lines and drying time delays.  Additionally, there may be other opportunities throughout the country (e.g. an ethanol plant or large feed mill) that may not be as convenient to deliver to during harvest, but will pay a premium later during the year.    

 

In providing the analysis for the banker, I assumed my client will price grain throughout the year before harvest which provides the lowest risk approach to my client’s marketing plan.  Once a farmer’s grain is priced on futures, opportunities to use carry and basis appreciation goes into effect. 

 

Since this example shows a loan on building the bins, we should also show a loan on the grain that is sold on futures but not yet delivered.  After all, if the farmer sold the grain at harvest that money could be used to pay down on the bin loan (or any operating note my client is carrying).  Therefore, I’ll assume a 5% rate for that shorter-term type of loan.  Over 10 months on $4 value corn that figures to about 1.6 cents per month in interest fees.

 

I try to account for every fee associated with home storage, including very small charges like loading and unloading fees and electricity to run the bin fans (these should be less than 5 cents total). Also, one could argue freight charges for hauling to the bin site,  but the ability to unload with no line whenever you want in my mind cancels this charge out.  

 

Following is a summary of the costs and savings on 17% average moisture corn stored on-farm:

  • Drying charge savings                         $.11       
  • Shrink discount savings                      $.04       
  • Feed Mill Delivery premium               $.06       
  • Market Carry                                       $.30       
  • Basis Appreciation                              $.20       
  • Interest on grain                               -$.16     
  • Bin Payment                                     -$.28
  • Loading/Unloading & Fans              -$.06                                     
  • Total Profit each year                       $.21 per bushel

 

If a farmer raises 200 bu/acre, on-farm storage increases their profits by $40/acre the first 7 years (with a bin loan).  After 7 years, the profit would be about $100/acre because there is no longer a bin payment. A 125 bu/acre yield farmer could estimate $25/acre profit the 1st 7 years and nearly $60/acre after the loan is paid off.  Also, bins are low maintenance and can be used for many decades.  Therefore, they are one of the best investments farmers can make, IF they use proper marketing techniques.  

 

Understanding how to use the market to increase profits with on-farm storage is something all farmers should be doing.  Not only for the increased profits, but the significant reduction in farm operation risk.  Many farmers are still falling into the trap of selling corn at a flat price after they have harvested the grain when they think the grain price is “right” or at a “high.” Unknown to many, this approach has more risk than the approach I advocate.  Over the next few weeks I will continue to show how this is the case.  

 

With tight margins facing farmers over the next couple of years (and likely into the future) it would benefit savvy farmers to learn the benefits of optimizing their grain marketing strategy.  Many farmers would be surprised to find all the potential profits trading this way provides them whether corn is at $3, $8 or anywhere between.

 

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