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Introduction
Deciding how long to store grain on the farm depends upon a number of factors. Changes in crop prices, basis patterns, interest rates and commercial storage charges all play a role in marketing decisions.
Storing grain on the farm is rarely considered a marketing strategy. More often, it is a necessity. Storage is a roof for the crop while producers wait to sell. If the “right price” isn’t available, cash flow needs or a lack of bin space pressure producers to sell. This is marketing by default and a poor use of farm storage. This module outlines the advantages and disadvantages of using grain storage as a marketing strategy.
Profit Potential
The profit potential of farm-stored grain depends on a change in prices or a change in basis or both. Long-term storage is profitable if there is a price rise sufficient to cover storage and interest costs. In a year of normal production, prices are seasonally lowest at harvest. A large supply and pressure on commercial handling and storage facilities pressure prices downward. This is normally followed by a post harvest price rise. Storing grain over a short-term following harvest (three to four months) often increases net returns.
A strengthening or narrowing basis indicates how storing grains can act as a marketing strategy. Local basis bids are usually weakest (widest) at harvest. (For more information on basis, see Basis-How Cash Grain Prices are Established.) The canola basis in October usually hovers around $30 to $35 under the nearby November futures. By avoiding cash delivery during a wide basis period, a farmer may receive an additional $10 to $20 per tonne when delivering into a stronger (narrower) elevator or crusher basis later in the year.
For example, let’s say that local canola cash bids are around $300 per tonne at harvest. In all likelihood, these local bids are trading around $30 under the November futures contract. This is considered a seasonally weak basis.
Nearby futures - elevator basis = local cash price
$330.00 - $30.00 = $300.00
With this in mind, the producer has two possible opportunities for the market to pay for storing grain for a while.
First, in a year of abundant supplies, harvest bids are low. The grain buyer has little desire to attract farm deliveries. The elevator system is congested. The country elevator basis is going to stay weak (or wide) until commercial storage congestion has cleared. Once deliveries subside, buyers become more competitive. When the basis strengthens (narrows) after harvest, a farmer, who has either stored grain or sold futures contracts as a hedge, earns storage income by earning income from a strengthening (or narrowing) basis. For more information on hedging see: Using Hedging to Protect Farm Product Prices.
Second, producers must stay up-to-date on the current price outlook, The harvest bid is seldom the top price of the year. However, a high bid in harvest may happen only if North American crop production has been dramatically reduced. In this case, harvest supplies are tighter and buyers are anxious about future deliveries.
The 1988/89 crop-year was an example of reduced crop production followed by a normal crop production the following year. Speculating with the crop in the bin that year was a costly decision. Many farmers expected another drought and stored the crop, holding out for a better price. However, the drought ended and holding grain was a poor marketing choice.
Storing until either cash prices or basis bids strengthen in the short-term can easily pay as a storage return, but it has to be managed. Even if prices fall, farmers storing grain can improve their returns through better marketing. Hedging by selling futures contracts offsets the cost of stored grain in a falling market. In a rising market, it is profitable to store without hedging or contracting.
Table 1, below, is an example of the cost of farm storage using past high interest rates to illustrate the point. The longer grain is held, the more expensive storage becomes. Only in the event that there is a general price rise throughout the crop year does long-term storage pay. Lost investment opportunity – other uses of money - should be considered when making that key decision of whether to store or to sell.
Table 2: Monthly Interest, Price per Tonne and Costs of Farm Storage
 | Oct | Nov | Dec | Jan | Feb | Mar | April | May | June |
Cash Price
Monthly interest | $280.00 | $300.00 | $315.00 | $290.00 | $280.00 | $290.00 | $320.00 | $330.00 | $300.00 |
| Accumulated | $0.00 | $2.57 | $5.34 | $8.28 | $11.01 | $13.68 | $16.46 | $19.55 | $22.75 |
| Net Returns | $280.00 | $297.43 | $309.66 | $281.72 | $268.99 | $276.32 | $303.54 | $310.45 | $277.25 |
Excludes depreciation on farm storage facilities
Assumes 11% rate of return |
Despite the spring price rally shown in Table 1, the farmer would have been better off selling in December. In this example, the cost of storing grain on the farm for an additional five months was not worth the wait, despite stronger spring prices.
Table 2, below shows the impact of varying interest rates and prices per tonne on the interest-only costs of storing grain.
Table 2: Monthly Interest, Price per Tonne and Costs of Farm Storage
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| Price Per Tonne | 7% | 8% | 9% | 10% | 11% | 12% | 13% | 14% |
| $80.00 | $0.47 | $0.53 | $0.60 | $0.67 | $0.73 | $0.80 | $0.87 | $0.93 |
| $100.00 | $0.58 | $0.67 | $0.75 | $0.83 | $0.92 | $1.00 | $1.08 | $1.17 |
| $120.00 | $0.70 | $0.80 | $0.90 | $1.00 | $1.10 | $1.20 | $1.30 | $1.40 |
Lost interest and bin depreciation are additional costs that reduce net returns. These costs will vary from farm to farm since the depreciation period for storage facilities is shorter than the length of time facilities are used.
Advantages and Limitations of Farm Storage
Producers should carefully consider these advantages and limitations of storing grain each time storing is being considered as a marketing strategy.
Advantages of farm storage:
- Avoids selling grain when prices are at a seasonal Iow (i.e., harvest).
- Avoids selling grain when basis is widest.
- Avoids waiting lines at the local elevator.
- Helps manage income for tax purposes.
- Allows more control over harvest operations.
- Allows storage all year at the same cost.
- Storage bin life is normally longer than the depreciation period.
Limitations of farm storage:
- Extra handling of grain is required when storing on the farm.
- There is an increased risk of storing grain: spoilage, theft, fire, etc.
- Difficult weather or excessive snow or rain may prevent immediate delivery and payment.
- Farm storage limits a producer's ability to lock in a price by telephone and deliver to a buyer for immediate payment.
- There is a fixed cost, over and above interest costs, to farm storage, whether facilities are used or not.
- Weather or prior commitments may affect a producer's ability to deliver and market grain at a later date.
The list of advantages and limitations is not complete, but it does include the major considerations. Farm storage is a marketing tool. If managed, it can increase farmers' net returns. However, if it is abused, storage can cost money.
Watch the market and do not get greedy. It may be better to empty bins earlier and sell at a profit than to speculate by keeping them full and running the risk of selling later for a loss. |
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