This year, the Federal Reserve has raised interest rates twice and signals two more hikes could happen before 2018 comes to a close. These long-promised steady increases put a squeeze on farm profitability.
Following historical lows in 2015, interest rates have jumped the most on current operating loans. In fact, interest rates on operating loans at commercial banks have increased from a low of 3.5% in the fourth quarter of 2015, to 4.9% in the first quarter of 2018.
Have you factored in how these cost-of-money increases affect your storage costs? It can add up quick.
“As farmers, a lot of us are guilty of just thinking of grain costs 1 to 2 cents per bushel per month to store,” says Chris Barron, director of operations and president of Carson and Barron Farms in Rowley, Iowa. “But does it cost us per day or per month?”
Barron discusses the financial considerations of on-farm storage with Chip Flory on AgriTalk After the Bell.
Barron, also a financial consultant for Ag View Solutions and Top Producer columnist, uses a tool to input grain inventory, the price of grain and the interest rate on your line of credit to estimate storage costs.
For example, consider the price of corn is $4 per bushel, you have 50,000 bushels in storage and the interest rate on your loan is 4.5% That equals $23 per day in cost or $710 per month, Barron says.
If the interest rate jumps to 5%, the per-month cost nears $1,000.
“That cost of money needs to be in front of us,” Barron says. “Are you OK paying $1,000 per month to sit on grain? If I hold it for four more months, it’s $4,000.”
Barron suggests looking at your local basis patterns and figuring out when your end users need grain. Then move your on-farm inventory when the profit opportunities arise.
“As a farmer, I like having grain in the bin,” he says. “But I like money, too. Do the math to understand your cost of carry and make informed decisions. There’s a big-time cost to ignorance.”
For more information:
Calculate the full cost of storing grain with this guide from Iowa State University.
6 Interest Rate Trends to Watch: Interest rates continue to inch higher for farm loans
Harvest Grain Storage Value: Watch for seasonal price movements to capture strong basis opportunities