One of the hardest things to deal with at harvest is knowing what to do with access grain. With increased supply of corn and soybeans, many farmers will have to make a decision to either store their grain or sell it off the combine. The proven long term strategy is to always build your own bins and store it yourself. But this article is for those who don’t have that luxury.
Right now there are many programs out there that try to sell the farmer on the “next best idea” to help with re owning grain at harvest. A lot of programs come from local elevators. But the most recent articles by FBN, is their Deferred Futures Price Contract. This contract is nothing new to the industry. Currently this program charges the farmer 3 cents per bushel and expects 30% cash when the farmer sells grain at harvest.
A typical elevator can charge anywhere from 2 to 5 cents with a 20% cash deposit for this type of contract. In addition the farmer is at risk of the fee of rolling the contract. If the basis continues to widen, then farmer has to pay the spread. Many times it can be as much as 10 cents per roll.
The cheapest and most efficient way to re own your grain is through futures contracts. A discount broker who trades futures can charge on average around 1 cent per bushel and only 10% to 20% deposit. This is basically margin money down.
The table below is the breakdown analysis:
The table below is the breakdown analysis:
You can see there is no rocket science in what FBN and the local elevators are doing; they are just charging more for a basic idea. By selling your grain at harvest, pocketing it all but 10% of your money, calling your broker and buying a futures contract is the most reasonable way. You are charged way less and you can pay off your operating note with the left over money.
Now remember what FBN and the local elevators don’t tell you, is the risk if prices continue to drop. If prices would drop below the amount of money (30%) you put in, you would have to send more money or get out of the contract. The only reason FBN and local elevators are asking for 20% to 30% upfront is to help maintain margin of the futures contract they own for you. Typically the odds of prices moving more than 30% is low, but it can happen.
The same goes for the broker. If prices go below the amount of money in your account, you would have to send more money in. One of the main points of this article is to help farmers understand this risk.
Cost of Elevator storage
The graph below shows how much the value of your corn crop could deteriorate by storing at the elevator. In the example below, the top section shows how much it would cost each month to roll until July; the total would be around 41 cents. This analysis assumes that the basis would stay the same. We know that typically basis does rally. But does it rally enough to sustain a 41 cent cost?
The bottom section shows if you would sell your grain off the bin and then buy a futures contract with a discount broker.
This next section shows the average basis at the harvest low and compares it to the highest July basis. This information was provided by FarmDoc of Illinois. Basically over the last 10 years, if you would have held your grain with the elevator it would have resulted in an 11 cent loss. This doesn’t include the price direction of where you sold the grain.
To explain more, the chart above shows that if you held your grain from December until July you would have gained about 30 cents in basis. However, in order to gain the 30 cents you would have had to spend 41 cents in storage costs and fees from the elevators; results in an 11 cent loss.
Now I do agree this analysis is only the average basis in IL. This is dependent on your location. Holding grain and not pricing in your basis may be valuable in certain local areas.
The important take away is that the farmer understands the risk and the analysis of storing your grain at the elevator. If you would like a specialized analysis of your farm and want to know what to do at harvest, please give Crop-Side Marketing a call. We create individual marketing plans for farmers.
If you would like more details about how to put more money back into your pocket, please visit our website www.crop-side.com or give us a call at 815-692-6612.