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By the time this goes live, we’ll probably be in harvest.
It’s important to think about where commodity prices are right now and what to do with grain that you haven’t sold.
So I want to put together a few things for farmers to think about when it comes to storing grain.
1) Storage costs per month
If you have grain that you haven’t sold, you have to take into account your storage costs.
The co-op is probably the most expensive option, usually anywhere from $0.03-$0.07 a month. Every month, you’ll lose that storage cost on that grain.
That’s a big move in the commodity market, especially for corn. So if you plan on selling in July and you’re going to pay seven months of storage, you’ll have maybe $0.35 of storage costs you’ll have to take into your calculations. It may be better to sell it and buy it back on paper, or just flat-out sell it and wait for next year.
You can also have condo and on-farm storage. Just know this: there’s always a storage cost.
It’s not always easy to tell, especially with on-farm storage, because it’s not a flat rate. The costs could be loss of grain due to mold, a hotspot getting into the bins, running your fans, or unloading all your trucks then unloading the bins and the potential danger to your employees they bring.
2) Basis at harvest
We’ve talked about basis a lot before, but it’s especially important when figuring out what to do with your grain.
Look at your basises on your different commodities and figure out, given the average of your past five years, where you’re at on basis? Is it a good basis?
The main purpose of storing grain on your own farm is to take advantage of an improved basis later on in the year—so make sure that’s the case. You’ll need to beat the cost of loading and unloading bins plus storage costs with basis improvements of at least $0.30.
If there’s a huge harvest in your area, then the basis isn’t going to be good at harvest. However, if the harvest isn’t great in your area, because of a drought or whatever, you may want to look at selling.
Look at your five-year average, and figure it out. The basis will tell you what to do with your crops.
3) Carry in deferred contracts
With all futures, there are several contracts every year. The deferred contracts are any of the contracts after harvest and before next year’s harvest.
Most people are going to look at July for corn versus December. If you look at the December contract and it’s trading at $3.30 and the July contract is trading at $3.50, that’s 20 cents just in holding your grain for six months.
Then you look at storage costs and the potential basis movement. It doesn’t make sense to store if there’s no carry in the market, and you want to take advantage of that carry when it’s big.
4) Cash flow needs
At the end of October is the first prepay date for 2017 corn seed. I feel like they get earlier every year, wanting my money to buy seed for next year, even though I’m not going to plant till April or May.
Make sure you have cash on hand in the fall to cover your debt payments and availability to a line of credit (or cash of course) to prepay the seed, because if you pay now, the discount those companies are willing to pay you is huge, even 10% off your seed. That’s not even including all your volume discounts.
If you want to be the lowest-cost producer, you’ve got to make sure your cash flow is on point to take advantage of all the early-pay discounts.
5) Opportunity cost of capital
When you decide to either convert your grain to cash or to put it into bins, remember that grain in a bin is only valuable to a couple of people. Cash, in contrast, is valuable to a lot of people. You can invest in other ventures, pay for a financial advisor, and do a ton of other things.
That’s the opportunity cost of capital, which a lot of people don’t think about. What can I do with cash today instead of hoping for more later from the grain in my bins? Is there anything I can invest in today? More farmland, an upgrade in tractors?
Neither selling all grain at harvest or storing it in grains is always the right answer. The best choice depends on a variety of factors, some of which I’ve included here.
My best advice is this: just don’t do what you’ve always done just because it’s how you’ve always done it. Look at your options, put in the work to forecast your costs, and make the best financial decision for your farm.
Need help sifting through your options? Let us know what you’re going through—we offer free grain marketing strategy sessions.