Some farmers like to hold old crop grain into the growing season as a hedge against disaster. As the charts below demonstrate, those who stored 2020 inventory into spring made handsome profits this year, no matter what their method of ownership.
Some of those strategies worked better than others, so a half-year after harvest it’s time to take stock of how different methods fared. The results demonstrate how factors unique to this very unusual marketing year combined to influence success.
Storage returns were evaluated using daily average corn and soybean cash prices reported by USDA’s Agricultural Marketing Service for seven regions in Iowa. “Paper” strategies included buying May futures, May at-the-money options as well as nearby futures contracts. Measurement began for each crop at the halfway point of harvest – for soybeans that was Oct. 2, for corn Oct. 15, according to weekly crop progress reports for the state.
Gauging returns from on-farm storage is always a tricky proposition. Capital costs for bins varies widely depending on their age, so this study looked only at variable costs. Those include transportation and handling in and out of the bin, electricity for running fans, and 1% quality deterioration. Opportunity cost was also factored, in reflecting additional interest expenses on operating loans extended because grain wasn’t sold at harvest to pay off the debt. Those storing grain physically benefited from historically low interest rates, including CCC loans at just 1.125% and commercial funds costing around 4.5%.
No charge was made for drying or shrink, under the assumption 15% moisture would be adequate for corn not stored past April 23. That was the day May options expired, providing a convenient ending point for the tally.
Trading futures and options isn’t free of course. Commission and fees are $5 to $10 round trip for farmers using self-directed online accounts with discount brokers. Options premiums and futures margin must be paid upfront. Still, thanks to those low interest rates these costs were minimal, a little more than a penny a bushel, even for growers trading nearby futures contracts that had to be rolled twice for corn and three times for soybeans. Those who use a full-service broker or who use cash hybrid contracts at their elevator pay more than that.
Based on these assumptions, the tables below show how on-farm storage compared to paper at the seven Iowa regions. Black numbers signify storage returned more than paper.
Some observations about the results:
- Storage beat options, which isn’t surprising. Average corn storage costs were 19 cents, compared to a premium of 39.5 cents for an at-the-money option. The 35-cent average soybean storage cost was also less than half the option premium of 78.625 cents. Yet the options paid off big time due to the huge moves by underlying futures. The $3.80 May corn call expired at $2.755, while the bean option ended at $5.7975. Options are always something of a dice roll, but when futures rally sharply the calls went deep in-the-money, matching most of the futures gains by expiration. The advantage of options is limited risk. Unlike futures or storage, the most you can lose if the markets heads south is the premium.
- Spreads made a difference for corn. Buying the nearby at harvest and rolling it made more than on-farm-storage for corn in all seven Iowa regions, a better success rate than selling cash and buying May outright. In a normal year nearbys roll to the next contract at a sizeable discount because supplies are plentiful and the market works to keep too much grain off the market at any one time. But the 2020 marketing year has been far from normal. Bull-spreading moved the nearby above defereds over the winter as panicked end users bought the front end to cover risk, removing any carry from the market that would have worked as an incentive to store grain. As a result, buying the nearby and rolling gained $2.53, seven cents more than buying May. Bull-spreading was less explosive in soybeans, where buying the May directly earned $5.23, a penny or two less than the rolling strategy.
- Basis played a role too. Basis appreciation is one reason why cash prices can gain more than futures. Carry that starts off large is gradually winnowed as delivery approaches. But lack of carry negated that driver of basis strengthening, decreasing total appreciation at some of the regional markets, one reason for the mixed record of cash gains compared to futures profits.
- Location mattered. Despite the record pace of exports, cash prices gained less at elevators in eastern Iowa closest to river markets. Seasonal closure of the Upper Mississippi River over the winter may account for some of this. Other buyers, including rail shippers, feedlots and processors tend to reflect more consistent demand.