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Market Commentary for 10/12/18
The USDA report this past week showed a yield reduction due to a lower plant population which caught the market off guard. However, with the increased carryout from the stocks report two weeks ago, the US and world carryout for this upcoming year are higher than what was predicted last month by the USDA. The slow pace of harvest is certainly helpful for the market as it will allow extra time to grind through more of the current production and allow for more storage of the crop still standing in the field.
The USDA report increased both last year's yield by .2/bu/acre and this year's yield by .3/bu/acre, but then offset these increases with a reduction of upcoming harvested acres. There is little bullish news for beans right now. The most recent stock report showed more stored beans than previously anticipated and the upcoming carryout will likely be double last year and 50% higher than the highest carryout ever recorded.
Did I Consider All The Possible Expenses In Storing My Beans?
Last week I wrote about how I could guarantee 19 cents of profit collecting carry by storing beans. A reader wrote that there were additional expenses I hadn't fully considered.
“ Jon, I agree with storing soybeans but the statement (I can guarantee myself 19 cents of actual profit) is a little misleading. If you just happen to have free extra bin space, free auger/tractor, leg/conveyor to handle beans in and out, free labor to carry out the in and out of the grain, probably a little extra trucking to bring beans to the bin site and then to town. I would argue the only real profit will be in the basis gain. If soybeans are dry moisture cables and fans do work very well but that is a whole different issue. Was not nit picking but for some guy not paying close attention to basis storing could end up actually costing them money. You have some cost also with commissions and margin money on your hedge. The nineteen cents can disappear quickly.”
The reader had some good points. So, let's address all of the added costs he brings up associated with storing grain. Following is a summary of those costs:
- Bin space / costs of a bin
- Auger to load or elevation system
- Labor to move grain in or out of the bins
- Trucking to and away from the bins
- Shrink loss
- Commissions and margin money
History Of My Farm Operation:
I prefer providing real-life examples about my farm operation, rather than broad/generalized concepts, because I think it's easier for farmers to understand different grain marketing strategies and ideas that way.
First, following provides some relevant details about my farm.
My farm is 60 miles away from the nearest processor. The lines to deliver grain during harvest usually exceed 3 hours during the busiest times of the day. Our farm is limited on labor and trucks. Logistically we can't haul our grain to this processor during harvest.
We are 5 miles away from the nearest shuttle loader who usually bids about 40 cents below the nearest bean processor throughout the year, including harvest-time delivery. While the shuttle loaders bid can vary some, pending export demand, historically it has averaged 40 cents pretty consistently.
I estimate freight costing 22 cents on average to move beans to the processor during non-harvest time and 37 cents during harvest. This is due to long lines and lack of trucks available at harvest time.
This indicates there is little advantage to haul my grain to the processor over my local shuttle loader during harvest. But, if I store my beans, I can collect about 18 cents more for my beans by storing them and hauling to the processor at some other time during the year (40 cent premium bid from processor – 22 freight cents).
This 18 cent spread, along with basis appreciation opportunity and market carry, was why I built storage 7 years ago to store all of my beans every year.
Now to answer the questions above.
Building and maintaining bins cost money, so that certainly needs to be considered in a farmer's grain marketing strategy. Based upon the information above, I can guarantee 18 cents of premium for storing my beans until after harvest versus taking the beans to the shuttle loader at harvest.
But to build a bin and pay it off in 7 years, a typical loan length, it costs around 30 cents/bu/year. So, that means to break even on just the bin loan I need to generate another 12 cents of premium through carry and basis. Since I built my bins in 2011, I've collected on average more than that 12 cent extra premium each of the last 6 years. Last week's article detailed an example of collecting just the carry premium for my 2018 beans (click here).
While many may debate how to figure the bin's cost after the loan is paid off, for me at that point the main costs are maintenance and property taxes which are certainly less than 10 cents/bu. total per year. The 18 cents I collect on moving the beans to the processor at some point after harvest more than covers those expenses for my farm.
I've heard some farmers being against building bins because of the increased property taxes. My farm is in a very high property tax county in Nebraska. The variance in property taxes for me was inconsequential on a per bushel expense given the storage premium I intend to collect.
Every farmer's local situation is different. Some farmers may have a processor as their only bid, or they may not have a processor within several hundred miles. The numbers outlined above would need to be calculated for an individual farm to determine if storing beans is profitable in their area.
Farmers could use an auger and tractor system to load bins, or they could put up a leg or loop system. Each has its pros and cons as well as expense. There is certainly some kind of an elevation cost associated with loading and unloading bins that will vary by farm operation. There is also a power expense to operate the equipment as well and depreciation for each bushel ran through it. Again I think these costs are limited to around 10 cents per bushel per year. Thus the 18 cent premium I received by storing the beans until harvest is complete offsets these expenses for my farm operation.
Labor Costs To Move Grain In And Out Of The Bins:
Well, it will be interesting when my father reads this section. He's the one who cleans out our bins. Is his labor free? What should he charge to clean out the bins?
Again, this would vary by farm. Some farmers have extra time on their hands and are looking for something to keep them busy. Other farmers who work part-time off their farm know the value of their time, so it may be more expensive.
The size of the bins would also be a factor. The time to clean out a big bin of 50,000 bushels, takes about the same time as a smaller bin of only 5,000 bushels.
Assuming it takes 2 hours to clean out a bin, at $25/hr, it would cost 1 cent/bu for a small bin and 1/10 cent/bu for a big bin.
This category is arguably the most debatable expense among farmers, and where I see the most cheating. I've had farmers tell me freight is only the cost of the fuel when hauling out of the bins during the winter or summer months, but will be first to tell me that trucking costs are 5 times those rates during harvest. Some farmers simply want to justify why they do what they do. I prefer instead to figure actual costs based upon real numbers from commercial truck drivers.
In my opinion it is way too costly for my farm operation to take grain to the local elevator during harvest. One, my time waiting in the lines even at my local shuttle loader can be up to 30 minutes. Hauling to my home bin site means there's never a line. Two, there is missed marketing opportunity from market carry and basis appreciation. Grain elevator storage fees can add up quickly if I’m waiting for basis opportunities versus storing the grain in home storage. I'd actually sooner haul my grain twice the distance to my home storage as to the local elevator. A few extra miles cost in freight is nothing compared to the profit potential I'd be missing if I put my beans in commercial storage.
But what about the expense for hauling the grain from the on-farm bins? This isn't an issue for me because I sell all of my grain with "on-farm pick up" included. I use commercial trucking companies and commercial rates to each location I sell. All my bids are FOB or picked up on the farm values. In the past 7 years of having on farm bean storage, I have never had to take a price that was even the same as what my local shuttle loader was bidding and subtracting commercial freight rates to their location. Again for my operation it always has paid to store the beans at harvest and to ship out to the processer later.
The key to minimize shrink loss is good shrink management. In my experience, some farmers just don't run their storage operation well. Some farmers will tell me they lose 2-3% in shrink when they store their grain. You can't just flip a switch and hope everything will work out. It's not that simple.
Just like farmers don't put a bean head on a combine and start harvesting, to minimize shrink, things need to be adjusted and monitored. In the last 7 years, the highest shrink loss we've had in the bin is 1%. In talking with many elevator managers across the Midwest most tell me they expect their shrink loss to be below 1% as well. Some years there was positive shrink when we harvested during a drought at 9% and were able to add moisture during the spring with fans when humidity levels were high. Most years there was little or no shrink at all. But even assuming at most 1% shrink, with cash bean prices at $7.50 right now, that would mean a 7.5 cent/bu cost. Admittedly, that possible cost was not included in my newsletter last week, but it's unclear today what my shrink loss will be.
Commission And Margin Call:
All farmers using hedge accounts will have commission charges. It's important to note that farmers using HTA’s also likely have an additional cost that is about the same cost of using a hedge account. Only farmers that are straight cash sellers won't have this added expense.
Margin call money can be easily borrowed from the bank if necessary, and I would only be out the cost of the interest on that short-term loan. Again the cost of using HTA contracts is about the same prices as the cost of commission and margin call interest so I think this portion is not relevant to the cost of storage. However compared to a straight cash seller of beans commissions would likely be 1 cent to roll the futures forward. If there was a $1/bu rally in the board that would create a margin call of $1/bu and the interest on that margin call would be a ½ cent/bu per month.
While policy coverage and prices vary, most are based upon dollar values and not bushels. I've seen policies range from ¾ cent/bu to 2 cents/bushel for the year. I did not include this expense in my article last week and it certainly is an expense that I need to include each year.
Last week I said I guaranteed myself 19 cents of carry, and after all this analysis I should have also included an additional 2 cents of potential insurance coverage and up to 7.5 cents of shrink potential loss. Both easily covered by the 19 cent premium.
While I spent a lot of time detailing and analyzing all of the possible expenses for on-farm storage which is very necessary, the more important question is.....what is my basis appreciation profit potential for holding the beans in storage even though I have the futures sold?
While that isn't guaranteed, on average basis increases 40 cents after harvest. I've even seen it exceed 60 cents. If I didn't have on-farm storage I miss out on nearly all that profit potential, so I want to be set up to take advantage of it. Historically, I am most profitable when I have my crop sold with futures, I maximize the market carry and the I work the basis market.
So, that's exactly what I intend to do again this year.
Superior Feed Ingredients, LLC
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