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Will grain storage pay this fall?
Just because this year's crop is expected to be smaller -- and a lot more grain bins have been built in corn and soybean country over the last few years -- doesn't mean you should automatically look to store your grain this fall.
There should be plenty of room to store what you need to store this year, after a growth in grain storage of half a billion bushels between December 2009 and December 2010. Nationwide, total grain storage capacity sits at just over 22 billion bushels. Federal officials say this year's crops will be around 4% smaller than a year ago. Add it all up and it means there's a lot more breathing room in the grain storage equation this year.
"While storage capacity is not completely fungible over space or by type of crop, there should be ample capacity to store 2011 crops," says University of Illinois ag economist Darrel Good.
So, how can you get the most bang for your marketing buck with this year's crop? Good says if you've got the storage capacity, look at either forward-contracting for later delivery or keep ahold of that grain unpriced if you think cash prices will rise moving ahead.
"Using a forward cash contract eliminates all uncertainty about the return to storage. Selling futures to price a stored crop introduces uncertainty about future basis levels and the actual returns to storage," Good says. "The second way to capture a return to storage is to store the crop unpriced in anticipation of higher cash prices. Forward contracting or hedging a stored crop would be done only if a positive return can be captured. Forward pricing eliminates downside price risk, but also eliminates a return from higher price levels. Storing a crop unpriced allows the producer to capture higher prices, but provides no protection from lower prices."
But, watch the numbers, especially with selling for later delivery. Depending on your local cash grain basis, it may not pay to hang on to your grain, even if you have forward-sold for a higher price. Make sure you know your storage costs and don't let them outweigh the benefits of forward-contracting.
"For corn and soybeans, the current price structure appears to offer a very small return to forward pricing a stored crop," Good says. For example, he adds if your local corn bid for March delivery is 24 cents under the July futures price versus a 12-cent bid under the December price, the premium you'll net in selling ahead -- 11 cents/bushel -- won't be enough to cover your storage costs in the meantime.
So, what's the market play to make? Pricing grain for future delivery does have its risks now. But, Good says though this year's corn and soybean crops are expected to be lower than earlier expectations, that doesn't necessarily mean the forthcoming market upswing will be enough to justify holding unpriced grain. So, it all depends on what your local grain basis and your grain storage costs.
"Storing corn and soybeans unpriced implies the expectation of prices increasing by more than the cost of owning and storing these crops. Higher prices may only be forthcoming if the concerns about the U.S. and European economies can be overcome. In the short run, that might require much smaller production forecasts by the USDA on September 12 and/or October 12. However, the market is already anticipating some reduction from the August forecasts so actual reductions would have to be surprisingly large," Good says. "Corn and soybean prices are at high levels and are facing some strong head winds. High prices and generally strong basis levels reduce the potential returns to storage."