Grain Elevators Face Uncertain Outlook

March 19, 2019 01:55 PM
 
An increase in on-farm storage and tight margins create volatility.

Like their farmer customers, grain elevators continue to face challenging financial positions. Slow trade progress with China and other countries combined with interest rate hikes and numerous macroeconomic forces hurt grain merchandising margins, as well as these five factors:

1. Storage

“The big issue is the large 2018 crops,” says Will Secor, a grain and farm supply economist with CoBank. “For an elevator, it’s not just the size of the crop, but it's where the crop is; we have some surpluses in localized areas, but generally, there is tight supply of storage and capacity. We’ve heard of a lot of producers using ag bags and opening up bins they haven't used in years.”

Illinois and Nebraska will have the largest grain storage shortages, Secor says. Iowa, Kansas, Indiana, South Dakota and Ohio will also come up short. 

2. Consolidation

The U.S. grain space still has many players, and consolidation has been slow to evolve, says Stephen Nicholson, senior analyst for grains and oilseeds at Rabobank. “But in some regions, only one grain buyer is left,” he says. “The major U.S. grain companies have been increasing both their control of U.S. storage capacity and the number of facilities but are still experiencing profitability challenges.”

In addition to the consolidating elevator side of the transaction, a smaller number of producers are controlling a large amount of grain in a local market.

“Producers are changing the supply chain by purchasing elevators and cutting out the elevator in the middle,” he says. “This means they control production, logistics and storage. Now they have access to most of the information that grain buyers used to have exclusive access to.”

3. Basis

Currently, farmers are still seeing good returns for storage, Secor says. The market’s spread is being driven by the big crop and variable demand. Soybeans have been the driver in basis levels. 

“When you looked at soybeans in the Dakotas in late 2018, you had very, very weak basis due to the lack of PNW export movement for soybeans,” Secor says. “When you looked at the rest of the country, you also saw weak basis for soybeans, due to the demand issue and the size of the crop. Today, basis has really strengthened in the Dakotas as trade relations have improved and other buyers have found U.S. soybeans valuable. Other areas have also seen significant improvement with some areas just a few cents below year-ago levels. For farmers, the pain point is that price levels remain below what was seen last year.”

Corn basis has also improved significantly since harvest lows. Some areas, like Iowa, have seen basis move above year-ago levels after starting at similar basis values compared to last year.

4. Transportation 

From a transportation perspective, Secor is watching two elements: diesel prices and truck drivers. “Diesel prices have leveled out and are similar to year-ago levels,” he says. 

On the labor side, he says, the biggest challenge is for elevators to get someone in a truck who can reliably deliver grain—at an affordable level. “There's a lot of wage pressure from the rest of the really strong economy here in the U.S.,” he says.

5. Competition 

Processors, ethanol, exporters, large livestock operations and food companies are all in the market to purchase grain—many of which are going directly to farmers. This is creating more competition between grain merchandising groups, Nicholson says, as these companies can be more nimble.

“In the future, there will be a closer contractual relationship between the producer and end-user,” he says. “For grain originators/handlers/merchandisers to remain relevant in the supply chain they must build trust with customers and be flexible.” 

Farmers Take More Control of Grain Storage Capacity

Storage is held in fewer and stronger hands, as evidenced by the declining number of off-farm facilities, says Rabobank’s Stephen Nicholson. Off-farm facilities are down 7%—or 638 facilities—in the past 10 years.

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