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Corn+Soybean Digest

Carrying Charges Hurt Your Bottom Line

A long-time customer, who is also a board member of his local co-op, had a great suggestion at a seminar in early December. "We're discussing sending monthly storage invoices to our customers who are storing grain in the elevator. This should make them aware of the cost of storage as compared to just taking it out of their checks at the end."

This board member was disgusted with having to pile corn on the ground because the elevator was filled with 1999, and in some cases, 1998 corn. It's not fair to customers who need the elevator each fall, he said. Even when the farmers sell the grain later, they're never happy with the net price.

Storing corn and soybeans from mid-September to early November made a lot of sense, - as in dollars and cents. The cash soybean bids in the western Corn Belt went from 52 under in mid-September to just 14 under in early November. Even if you paid the 15/bu minimum charge, the improvement in cash basis combined with the rally in November and January futures made holding cash soybeans the right choice.

If you currently have corn and soybeans in commercial storage, what alternatives do you have? Here are four options to consider. The last three look like the best choices.

1) Hold the cash grain and hope that prices continue to move higher. It's possible, if weather problems develop in South America, that cash soybeans will go up enough to offset the cost of carrying them.

2) Sell the corn and soybeans and replace them with long futures. The benefit with this strategy is that you lock in the current basis and stop interest on your operating loan. If your loan is paid off, you can invest the money until you need it this spring. The risk is the same, but if prices drop lower, you may need to send in margin calls to hold the position. You'll save (or earn) interest using this option, and if futures rally sharply higher later this year, you will have sold on a narrow basis.

3) Sell the grain and replace it with call options. This will also allow you to lock in the current basis and stop interest on your loan. The option premium you pay for the call is likely to be less than the interest of holding your cash corn and beans. The disadvantage is that, if futures chop sideways and don't make a significant rally, you may lose the option premium that you've paid. If prices chop sideways and you owe money at the bank, holding the crop isn't a good alternative, either.

4) Sell the corn and beans and stop the storage charge by entering into a basis contract. If your elevator will give you a basis contract, you lock in the current basis. You'll get 80-90% of the money and can still have the advantages of a higher futures market. The disadvantage is that you won't get all the money. And, if corn and beans turn sharply lower, the elevator may ask you for additional margin money.

As you look at these merchandising alternatives it becomes obvious: Grain merchandising is, plain and simple, money management. No one, including the author, knows what the futures market is going to do. But for most farm businesses, every dollar saved on interest is a dollar that goes right to the bottom line.

My long-time customer said, "Maybe it would work better if the bank sent a monthly invoice as well."

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