Storing corn will pay off, economist says
As the 2009 harvest draws near, producers will finalize their decisions about whether or not to store their crops and for how long. And according to University of Illinois economist Darrel Good, the current price structure clearly favors corn storage over soybean storage.
Storing crops in anticipation of higher futures prices is very much a speculative decision depending on a number of factors that are difficult to anticipate.
"Producers can receive returns to storage in the form of higher cash prices resulting from a strengthening basis and/or from higher futures prices. While not entirely predictable, basis patterns are a bit more stable than price patterns, and a look at current new-crop basis levels can give some insight into the potential return to storage from basis appreciation," Good says in a university report.
"Bids for harvest delivery of corn at selected country elevators in east central Illinois on September 4, 2009, averaged $2.81. That average was $.2525 under the settlement price of December 2009 futures on the same date. The basis of about $.25 under is much stronger than the basis of the previous two years and is similar to that of three years ago."
Typically, a strong basis suggests that further basis appreciation may not be sufficient to cover the costs of storage, although storage costs vary widely. The carry in the futures market should also be considered in making the storage decision based on potential basis appreciation.
"On September 4, July 2010 futures were priced $.315 above December 2009 futures. A cash bid for harvest delivery of $2.81 -- $.5675 under July futures. Some significant strengthening of the July basis would be anticipated by the spring of 2010. If that basis strengthens to $.15 under July futures by early June 2010 as it did in 2009, then the market is offering $.4175 per bushel to store corn from harvest until June 2010," Good says.
"For corn harvested in early October and stored until early June, the interest cost on $2.81 at 6% interest would be just over $.11 per bushel, leaving about $.305 to cover the cost of storage. That magnitude of return would likely more than cover the out-of-pocket cost of storing corn in existing on-farm facilities," Good says.
Depending on the quality of the newly harvested crop, the risk of storage losses in on-farm facilities should also be considered in the storage decision. In addition, the only way to "lock in" the anticipated return to storage is to forward price the stored crop. Otherwise, the higher cash prices associated with basis appreciation could be offset by lower futures prices.
The economics of soybean storage are currently very different than that for corn.
"On September 4, 2009, for example, the average harvest bid for soybeans at selected country elevators in east central Illinois was $9.09, only $.13 under November 2009 futures. In addition to the very strong basis, the soybean market is characterized by a lack of carry in the futures market," Good says.