John Phipps: Avoiding Grain Storage Fees is Tricky Business

03:36PM Sep 23, 2019
U.S. Farm Report viewer Eric Lang has a question about using Exchange Traded Fund to avoid grain storage fees.
( Reuters )

Loyal viewer Eric Lang asks about alternatives to crop storage:

“Would not farmers be dollars ahead to deliver and sell all of his or her corn and beans at harvest then immediately invest all of the dollars in an Exchange Traded Fund, thus averting the storage fees and pencil shrink that elevators charge?”

My answer is a firm maybe, but usually not. This basic plan is tougher to pull off than it appears at first glance.

To begin with, the shrink you refer to is unavoidable – not an arbitrary charge by elevators.

Grain is priced at a standard moisture – in this case 15%. Regardless whether you are selling or storing the elevators adjust the number of bushels you deliver to this standard because they are not in the business of buying dry matter or DM, not water.

To put it another way, for every 850 pounds of DM, you get to sell 150 pounds of water as well, but no more. 1000 pounds of corn at 20% instead of 15%, contains 800# DM and 200# of water, but for 800# of DM you can only include another 141# of water. This is where the term shrink comes from: the amount you deliver is shrunk to from 1000# to 800 plus 141 or 941#. In actual practice the calculation of shrink is done with shrink tables like this one.

At my elevator, 1000# of 20% corn would end up decreased by 7% or 70# for an adjusted amount of 930# - what is called the dry or #2 weight. The shrink difference between mathematic and table shrink of 11# was irritating, but standard practice, and the rules are posted.

In addition, the reason for the 15% benchmark is to be dry enough to store without spoiling, so the elevator has to extract the extra moisture at significant cost. In this case, there would be a drying charge of 10 times 1.63 cents or about 16 cents per bushel deducted whenever the corn is sold.

These charges can make on-farm storage and drying more attractive. My main point is when the truck is dumped shrink and drying charges are automatic, regardless if it’s being stored or sold. Further storage charges are self-explanatory, and added on monthly.

Buying that corn back with a futures or other contract is another challenge. The difference between local and ETF prices, basis, brokerage and other fees, and deciding when to buy and sell the contracts are all costs or potential losses. This strategy of “owning the corn on paper” can work, but my general rule is it takes a pretty strong price increase to pay off, and too often ends up being a speculative rather than conservative strategy.  Whether it is better than retaining ownership of the corn is never obvious, and one of those decisions that keep us awake at night.

USFR 09/21/19 - Customer Support