Posted by: usset001 | April 16, 2010

Can carrying charges in corn pay for on-farm storage?

I continue to receive some very interesting comments and questions via email. Today’s question concerns carrying charges and opportunities to pay for on-farm storage.

With corn becoming a more prominent piece of my planting mix and ever-increasing corn yields, should I be thinking of more on-farm storage to capture the carry in the market? Is the carry in the corn market (1) reliable every year?, (2) enough to cover all expenses related to storage?, and (3) typically better than wheat and soybeans? And one more question concerning basis; Is it better after harvest?   Signed, “E” with too many questions     

To answer your questions…

  1. Is the carry in the corn market reliable every year? Based on a history of the past two decades, the corn market shows a “large” carry in 4 of 5 years. I define a large carry at harvest. If the Dec-Jul carry is larger than 140% of interest costs, I call the carry “large.”
  2. Is the carry in the corn market enough to cover all expenses related to storage? No. The carry will not cover all of your fixed and variable costs of building and maintaining on-farm storage. I find that producers rationalize the need for storage with two arguments, a) I need the space for operational reasons – more storing and drying capacity and the need to keep my harvest moving at a fast pace (hauling to town and waiting in line slows it down) and, b) the marketing opportunities, include the ability to “sell the carry” in the market.
  3. Corn carrying charges are generally larger and occur more often than wheat – by my measure, large carrying charges occur in the spring wheat market about one in every three years. Soybeans have not shown a large carry at harvest in the last 20 years.
  4. Basis is generally better after harvest. Let me give you some hard numbers for Pipestone (Southwestern), MN. Over the last 10 years, the corn basis has averaged 47 cents under the December contract at harvest, and about 36 cents under the July in the late May/early June period. A storage hedge gives you the opportunity to capture the carry in the futures market, and another 10 cents in basis improvement.

Signed, Ed with too many answers


Responses

  1. I’m not so sure that a producer can’t pay for storage with a combination of basis, carry, and storage.

    Being ultra simplistic, let’s say a producer is able to pick up an extra $.15/bu each year by utilizing thier storage (due to $.05 improvement in both carry and basis and $.05 in drying savings; net of interest, utilities, insurance, etc.). If you take that $.15/bu annual savings divided by a 5% cost of capital you acheive a net present value of $3.00/bu for your storage investment.

    The cost to build a 100,000 bu storage system is approximately $225,000 today or $2.25 bu. The net present value of your annual $.15 savings ($3.00) exceeds the cost of building the storage making it a wise investment (assuming, of course, my simplisitic assumptions are correct)

  2. First sentence: change the word storage to drying….


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