Posted by: usset001 | March 23, 2013

Should I build grain storage?

grainbinsI received an interesting question about storage.

Question: Ed, I farm corn and soybean in west central MN. I am very short on  grain storage. Most  of my hauls to the coop that I do business with are with in 6 miles or less, waiting time to unload has, for the most part, not been bad, but there are days. Can you give me some advice on grain storage? I don’t see it as a slam dunk to build like many others,or am I missing the boat and should build storage for at least a portion of my production Can you show me that it is not a losing proposition but a good investment.
My reply: You’re asking a really good question, and I will try to give you a simple answer.

It is difficult to make the case for building storage based on its value in “marketing.” Yes, I know there have been recent years when corn and soybean prices increased $1-2 after harvest and, in hindsight, new storage would have paid for itself in one year. As nice as this story is, there are also years when farmers used storage to turn $4 corn into $3.50 corn 8 months later. In my opinion, the challenge with storage and marketing is the insistence of storing grain after harvest, whether or not the market calls for a storage strategy.

Now let’s look at a different reason to build storage – its value to the farm operations. You hinted at this need when you said, “waiting time to unload not been bad, but there are days.” As local elevators continue to consolidate and farms get larger, more farmers are making the case for storage based on operational needs alone. They argue it is not possible to harvest their large crop in a timely manner if the bulk of their harvest must be driven to town and someone has to wait 25 minutes to unload. Harvest must be timely – no waiting!

These people build storage to support the operational needs of their farm (and typically add drying facilities at the same time). The benefits from marketing – over time I believe they will be more positive than negative – are an “add-on” to the operational need.

I suggest you look at your farm and think about whether or not storage capacity will add value to the operations side of the business, as well as the market side. If it brings operational value, I like to think you just added equity and value to your entire farming operation. Hey, we both know farmers who are paying $12,000 per acre to expand and add value to their operations. It’s quite possible that new storage is a more effective way to add value to your farming operation.

Good luck with your decision. If we can get the temps above 30 degrees, we can start to think about planting.
Ed


Responses

  1. Ed, there is also another value with storage. It is an option to “hedge” a short futures position. Living in Sweden, where we grow mainly wheat, I have found this option worth more than the cost of building a silo – if the farmer is a net investor. The cost of capital has to be right. Sometimes the contango in the futures market is high enough to load the silo, sell the futures, invest the money, and do a classic “cash and carry” arbitrage. Futures are priced at the marginal (highest) cost of storage. Some farmers, but not all, have lower cost of capital than that. Moreover, there is a strong mean reversion in grain prices, which can be used for added speculation without sold futures when prices are “really low” (i.e. lower than the last two years). That actually works. I published a textbook in Swedish exactly one year ago, on risk management for farmers taking such plays as examples.


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