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Why is Grain Storage so Important?

Date: 
Author: 
Matt Roberts
Educational Opportunities: 
Videos
Interests: 
Grain, Young, Beginning Farmers
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My name is Matt Roberts. I'm the founder and owner of the Kernmantle Group in Columbus, Ohio. Today I want to talk a little bit about storage and the role of storage in a farm. Think about this for a second. How many months of the year do we harvest corn in America? Normal year, two months. However, we consume it year-round.

How do we square that circle? We square it with storage. It's through storage that we have grains available all 12 months. The reason for that comes from a really important economic concept you should understand, which is that storage provides a fundamental service to the economy. Storage is what makes that possible. For that reason, the economy has to incentivize storage. It has to make it profitable so that there is grain available come summertime.

In contrast, and this is where we get to with marketing, when it comes to simple speculation in futures, just that stereotypical, I'm a farmer looking at prices, watching prices too much on my phone whether I'm in my combine, my tractor, or my pickup; looking at it a little too much. You don't get compensated for trading futures. Futures are really efficient. There's not compensation there for just speculating, but there is for storage. The fundamental takeaway is if you want to improve your selling price on your farm, you need to understand how storage works. You need to understand how a grain elevator makes its’ money. That is through carries in the futures market and basis appreciation.

The first piece, understanding those carries in normal years, carries, so the idea that maybe last December corn prices were 3.40, and at that same time the July futures were 3.70 on the board. That 30 cent carry, that's the economy's incentive to store. You combine that with the fact that over the course of the year, basis tends to improve. Harvest that tends to be weakest, in the summer it tends to be strongest.

When you combine those two things together, that's the revenue gain from storage. Take out a couple cents for opportunity cost, shrink, and all of that stuff. The reason it's important to understand that and how elevators make money, and how to run your farm the same way is if you will store on your farm like an elevator, make those same decisions, historically you're only going to give up maybe half a cent per bushel in returns. Yet the amount of risk you take is going to shrink by a factor of about four.

When you store like a typical farmer, you're doing the pour and pray method. You pour it in the bin, you pray for higher prices. You store like an elevator, you're looking at basis, you're looking at carries, the storage is hedged with HTAs or futures. The difference in average selling price is maybe half a penny, but in your best year that pour and pray, it's going to make four times more money. In your worst year, it's going to lose four times more money, but it's going to average out to only be about half a penny difference.

The reason it's important to understand that in these tight margin times, and we have so many weak balance sheet producers, you don't need to take that amount of risk unless you're going to get compensated. Half a penny is not enough compensation. If you own storage, you need to understand how a grain elevator work, and how you can start running your storage like a grain elevator.
 
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