Market News & Headlines >> Katie's Blog: How To Decide On New Storage
By Katie Hancock
Brock Marketing Consultant
Recent issues of the Brock Report have covered this fall's wide river basis, which coincided with a large supply of old and new crop. Producers without full storage capacity are scrambling to store the 2017 crop. Like many things, when you know you need them, it’s too late. While the river basis has improved, more producers are asking the same question, “Should I add on-farm storage?” In general, I say yes, but I want to share questions I ask before making a final decision on a matter such as this.
What’s the return per bushel? In a normal year, I feel comfortable counting on 50 cents in corn or soybeans until March. As a percentage of return to each bushel’s value, it is typically more advantageous to store corn. For example, 50 cents on $4 corn is 12.5% return and 50 cents on $10 soybeans is a 5% return. I have not stored wheat on-farm in a few years, but sometimes it pays to store wheat until corn harvest, move those bushels, and then store corn.
Basis does not widen this much in a normal year. Soybeans, this year for example, would pay for a third of the grain bin in one year! But this is not a typical year, so it shouldn’t be considered the norm. I see storing corn and soybeans in 2017 as a way to avoid an opportunity cost rather than actual profit. Either way, there’s a nice return in years like this.
What’s the return on investment? There are no free rides. It’s not as simple as saying I can typically make 50 cents storing because it’s not free to have on-farm storage. Although I’m focusing on grain bin storage, even bagging and piling are not free from risk and investment. I have read articles detailing grain bins for $1.50 per bushel, but that’s low in my opinion. Size and complexity play a major role for each individual. I use $2.50-3 a bushel for a semi-modern setup. I admit I am overly generous in that figure. Legs, fans, drags, dryers, concrete, and electrical are major expenses that are easily overlooked. This is a fixed cost that you’ll have every year until it’s paid off. Variable expenses like maintenance, electricity, and interest on grain will continue after the loan is paid, but are very small in comparison. I expect 10 years to cover the primary investment of grain bins—this considers every year will not be as advantageous as 2017. Bins are a long-term investment, and it takes a while to fully see results. If you’re near retirement, it may not be as easy to justify. Even if I netted the same money using commercial storage in the short term, I’m paying for my own facility and not someone else’s in the long-term.
What value is harvest speed? It’s no secret that waiting in an elevator line is burdensome. You’ll need more trucks with drivers, and won’t be able to work as late. Some years that’s not a big deal, but opportunity costs add up if the crop deteriorates—like a wind storm blowing through. It can be tough to propose a bin system to the lender based primarily on logistics, but any lender that understands farming will see the value.
Do you have discipline to sell? Consultants with Brock always stress using storage with a plan rather than gambling. For example, we did not recommend storing the 2016 old-crop corn until 2017 harvest. Some producers did that and I’m not criticizing them, but rather pointing out that’s not the kind of storage plan we advise. I give myself a timeline to sell— usually by early Spring. If you like to be overly careful with your marketing, you can lock in the price and basis for a later date as you fill the bin. This year, we advise to wait for the basis to improve before doing that. Either way, there’s a lot of flexibility to work around each year’s situation—particularly with basis changes. Futures prices are only part of the puzzle.
In a normal year, you won’t hit a home run storing, but the benefits are there almost every year. It takes physical and mental work to incorporate on-farm storage, but I find it worthwhile. I expect producers to focus on grain storage in 2018 before other investments. It’s not only a decision on what you gain, but also what you’re giving up.
Email Katie at [email protected]