Posted by: usset001 | September 21, 2009

Should I build more on-farm storage?

grainbinsI received an interesting comment/question from a reader. Inflation and the impact onb commodity prices is foremost in his mind.

He wrote, “As a corn and soybean farmer, I won’t be selling any of my grain until I have to clear out bin space.  It is only a matter of time until inflation is realized in our commodity markets, with a falling dollar value and rising prices in all internationally traded commodities.”

 “Don’t you think we’re still in the high inflationary environment of 2007 & 2008, even more so with the continuing of two wars and a pending massive federal government healthcare spending plan? They just create all the money for their projects from nothing.”

I replied with the following…

I share your concerns about an inflationary environment, but the key is timing. I started worrying many months ago, and I was concerned enough to check out mortgage rates (debt is a good thing in an inflationary environment), which were running around 5.5% early in the year. Today interest rates are about 4.5% – timing is everything.

 Despite our inflationary concerns, deflation continues to rule. My Economics 101 class taught me that inflation is primarily a monetary phenomena, i.e. determined by the money supply. Money supply is determined by the quantity of money in the economy (up, up, up) times the velocity of money, or how fast it is circulating through the system (down, down, down).

 Here is my concern with a marketing strategy that calls for building more bins to hold more grain as we wait for higher prices. We run the risk of going broke before the bull market starts.

 Some analysts are calling for cash corn prices dipping below loan rates before the year is over. I can’t get that bearish, but we have a large crop to harvest and, unfortunately, I sense that a larger than normal portion of the crop has NOT been priced.


Responses

  1. maybe instead of building a bin and hoping….a better idea might be to build bins and sell a huge carry perhaps allowing the carry to help pay for the bin……..especially if one can pick up big basis appreciation???? or another idea is to sell a call on the grain to help pay for the bins……….i like the generic idea that inflation will come again and drive prices up……..but one really needs to do something in the meantime………other then simply waiting

  2. I think that you are confusing market volatility and inflation. I don’t think that a run up in price such as oil did last summer is inflation but more correctly speculation and/or volatility. The fact that oil is $70 now verses $40 say five years ago is inflation. Case in point, feretilizer is now falling so is that inflation.
    6% inflation is a rise in corn price of $.20 /bu in the AVERAGE price of corn for the year


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