New Spurt in Grain Storage

August 30, 2011 08:28 PM
New Spurt in Grain Storage

Capacity increases create more market opportunities

Nothing short of a rebirth in grain storage capacity is occurring throughout the heartland, and the growth spurt is creating new marketing opportunities for producers.

"This is an exciting time in the grain industry," says Joe Taets, president of the Grain Group for Archer Daniels Midland Company (ADM), Decatur, Ill. Taets says ADM is boosting its grain storage capacity in key crop-growing regions of the world as part of its strategy to accommodate increased production.

As of early summer, ADM had made announcements to build four new elevators in the U.S. in geographical regions where the company has a limited presence.

In addition, the company is adding storage to existing facilities and continues to look for expansion opportunities at both existing and new locations, Taets says.

Like ADM, Cargill AgHorizons is a company on the move to grow its storage capacity. Cargill is investing $25 million at its Hales Point, Tenn., grain elevator in a major modernization project. In addition, Bunge North America announced plans in April to build a new facility along the Mississippi River in a Fairmont City, Ill., joint venture.

"We’re seeing a boom in commercial grain storage capacity, with all kinds of construction going on," says Tom Tunnell, president and CEO of the Kansas Feed & Grain Association. In his view, more growth has occurred within the past five years in his state than at any time since the 1950s.
From February 2008 to February 2011, U.S. commercial grain capacity volume increased 15.6%, with nearly half of the increase taking place from 2010 to 2011 alone. During the past year, volume grew by 7.3%, according to data from USDA’s Farm Service Agency.

Looking at key states from 2008 to 2011, Nebraska posted 36.6% growth; Illinois, 21.5%; Kansas, 11.7%; and Iowa, 10.9%.

Storage Upgrades. The boom in capacity is occurring at all levels: from the largest multinational grain companies, such as ADM, Bunge and Cargill, to co-ops and country elevators, to large grain growers who are buying their own grain elevators in order to have sufficient storage and the opportunity for new profit centers (see the "More Producers Buy Elevators" sidebar on page 26).
On the supply side, grain officials see two reasons for the increase: a ramping up of storage as crop yields continue to increase due to new seed varieties, and the replacement of inefficient elevator flat storage.

"A significant portion of grain storage capacity was constructed a generation ago and needs to be replaced or expanded," says Mike Hechtner, Central Region president for CoBank, a Denver-based agribusiness lender. Hechtner says that co-ops funded by CoBank are increasing their storage capacity.

Another important reason for storage increases is that grain stored on the ground has become a year-in, year-out occurrence. New grain harvesting equipment also is allowing farmers to get crops out of the field faster and to elevators quicker. This has created a need for elevators to be able to unload trucks faster.

"There has been a bit of a bottleneck," Hechtner adds. "We have to get producers in and out. Speed is a major reason behind the growth."

Another factor for an increase in storage demand is more carry in the market—that is, more price benefits for farmers to market their crops from April through August. "Farmers can take advantage of the carry," Hechtner says. "Elevators can make money storing this grain."

Feeding Ethanol and Exports. The other side of the coin spurring storage growth is an uptick in demand.

"Ethanol plants need grain delivered 365 days a year," says Tracy Gathman, general manager of Two Rivers Cooperative in Pella, Iowa. "There are more marketing opportunities for the entire year," he says.

The ethanol industry boomed during 2007 and 2008, creating demand for grain storage almost overnight. Ethanol now takes 39% of the corn crop. Furthermore, this occurred at the same time other grain demand blossomed, namely exports to China. As a result, grain companies have invested in shuttle loaders to get railcars ready for shipments to the Gulf of Mexico and the Pacific Northwest. Because of that, grain companies need storage that is bigger and faster, Hechtner says.

Officials believe ethanol demand and pressure on the export front will continue. Growth in capacity over the next five years will be faster than the last five, Hechtner predicts.

Capital Requirements. Despite storage demand pressures, it’s possible that growth in capacity could be forced to moderate somewhat this year, but not necessarily by choice. The reason is high capital needs due to margin calls of futures contracts, says Todd Farris, manager of the Elkhart Grain Co., Mt. Pulaski, Ill. While skyrocketing grain and oilseed prices have been good for farmers, they mean elevators must come up with large amounts of margin call money.

"When you buy grain from farmers, you have to hedge it," Farris says. "That makes your capital needs greater." It’s possible that some plans for expansion that are on the books will have to be delayed, he says. As a result, there could be some storage issues this fall.

Could that affect basis? "A postponement of new capacity might be an issue in a few areas, but I don’t see it as a significant factor for fall basis," says Darrel Good, a University of Illinois ag economist.

Overall, the balance sheet of co-op grain facilities is strong, Hechtner says. He adds that grain firms have recent experience with margin calls, having worked through the issue in 2008, another year in which crop prices spiraled upward. In addition, co-ops have built up a lot of working capital.

Regional Needs. Demand for storage ripples across the U.S., but regional differences exist. In Kansas, for instance, more small grain, harvested in the summer, is being followed by corn and soybeans. That puts more pressure on fall storage. In addition, yields in western Kansas have substantially improved.

More corn is being used in rotations in western Kansas, says Dan O’Brien, a Kansas State University agricultural economist.

Wheat harvests in recent years have been good, which adds to corn and soybean storage problems in the fall. This, in turn, is stimulating even more grain storage construction. Farmers are intensively cropping their land, including wheat with corn, grain sorghum, sunflowers and/or soybeans in the mix, while minimizing fallow periods.

It’s not boom times for grain storage everywhere, though. "In Texas, we have no storage problem, and from what I see, no commercial storage is being built," says Ben Boerner, president of the Texas Grain & Feed Association.

"We still have 25% of our state in extreme drought status, and those areas are where our grain production is typically the largest," he adds. "For anybody who was even considering adding storage, it’s now the furthest thing from their minds."

Narrowing of Basis.
Kansas’s O’Brien says an eventual result of the rapid increase in grain storage capacity in the Midwest could be the narrowing of basis. Due to the lack of storage capacity, wheat basis in particular was wide in 2010.

"When elevators are full and the only place to store grain is on the ground, it widens the basis. That leads to and is reflected in lower cash bids," he says. With more storage capacity, grain elevators will have more incentive to keep their facilities full of grain to earn storage income. More capacity could end up helping basis by avoiding harvest gluts that overwhelm local facilities.

Ramping Up for Harvest. The potential for another big harvest this fall is spurring renewed interest in the building of grain storage facilities, says Tom Levasseur, a managing director for Rabo AgriFinance, St. Louis. Three of the past five years have seen all-time records in corn production. Or, put another way, bin busters.

What that’s led to in the heart of the Midwest is a construction boom that’s only good news for farmers seeking marketing options. "I’m adding storage every year," says Elkhart Grain Co.’s Farris. "We’re trying to keep up with what farmers are producing."

The building trend will continue, Farris says, as the need for farmers to unload more and faster will only increase. "Farmers continue to bring it in a lot faster, even faster than just 10 years ago."

Changes in the Grain Industry

The following list of grain elevator purchases and storage expansions in the past 10 months showcases how the grain industry is quickly changing.

  • Bunge North America buys Morristown Grain Company, which includes elevators in Morristown and Rushville, Ind.
  • Bunge forms joint venture with SCF Grain LLC to build a grain facility in Fairmont City, Ill.
  • ADM will build two new grain elevators in Fullerton and Newman Grove, Neb.
  • ADM-Benson Quinn will construct a shuttle loader grain elevator and 120-railcar loop track in Hebron, N.D.
  • ADM plans to expand three facilities in northeast Missouri and western Illinois.
  • The Greenway Co-op, Austin, Minn., plans to construct the world’s largest grain dryer and new storage capacity of 1.1 million bushels.
  • Cargill AgHorizons will invest $25 million at its Hales Point, Tenn., grain elevator.
  • Gavilon purchases DeBruce Companies, including its grain handling facilities, fertilizer distribution network, feed mills and bean crushing plant. DeBruce Grain Inc. has elevators in Kansas, Iowa, Nebraska, Texas, Kentucky, Oklahoma, Mississippi, Alabama, Indiana, Wisconsin and Mexico. The two companies create the third-largest grain storage network in the U.S.

More Producers Buy Elevators

A growing number of large-volume producers are buying grain elevators, primarily to have a home for their grain, but some also see them as a profit center.

"It’s the perfect complement for larger industry players," says Tom Levasseur, a managing director with Rabo AgriFinance, St. Louis.

One such farmer turned elevator owner is Doug Roth, a 5,000-acre corn and soybean grower in Harrisonville, Mo. He has the capacity to store 1.1 million bushels. Roth’s original intention in buying an elevator was to store his own production. Today, he also views the elevator as a profit
center in its own right, as he sells high-quality corn to a pet food company and feed to a poultry plant. This adds value to his corn.

A specific challenge of running an elevator is the need to be perfectly hedged, Roth says. "Running an elevator takes a different set of skills."

For example, his pet food customer wants commodities just two to three days in advance. Another challenge is to be able to have enough working capital to make margin calls on futures contracts, and that means having a lender who is comfortable with them.

Large farmers can build storage, access rail lines, hire grain merchandisers to help manage risk and go directly to end users as they increase in scale, Levasseur says. Some are buying grain to add to capacity and contracting with feed companies, ethanol plants and other end users.

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