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August 22, 2017
Storing the record 2016 corn crop was a great strategy. It was also a money pit. Which side of that divide showed up on your income statement depended on not only when and how you sold, but also where you farm. Exaggerated regional basis trends over the past year amplified storage returns in some areas, while leaving others in the red.
Of course, if you rolled the dice and held on to your crop until the peak of the summer weather rally, on-farm storage likely was a winner. But even then, Farm Futures long-term study of storage strategies shows some growers would have been better off moving corn earlier.
Our study looks at storage returns from a variety of strategies at different locations based on futures, options and cash prices from the 1985 to 2016 crop marketing years. For consistency, we assume corn is moved by the time July options near expiration in mid- to late June. Some years prices are peaking during that window. This summer futures headed in the opposite direction, making new lows as July puts and calls got ready to go off the board.
On average, that made storage returns more elusive after expenses, including commissions, options premiums, commercial storage payments, handling costs and interest paid on loans while corn sat in the bin. Commercial storage and buying call options to replace cash sold at harvest fared worst. That’s not surprising; these strategies are the least profitable long term over the life of the study period.
The most profitable strategy was a bit of a dark horse. Selling deferred July futures at harvest to hedge inventory kept on farm equaled or beat flat cash storage at all locations. On average across the nine locations, it earned 6 cents per bushel, a penny more than flat-cash storage.
The storage hedge, though it involves futures, is actually the most conservative strategy in the portfolio of tools analyzed. Fixing the futures price limits gains to basis appreciation.
That turned out to be a fairly safe bet in 2016, when record production swamped the cash market at harvest.
Not only was nearby basis against December weak last fall. The carry between December 2016 and July 2017 was also decent, around 24 cents a bushel. Farmers and elevators built plenty of storage in recent years, holding down carry some. But 3 cents a bushel per month carry before costs, added to nearby basis appreciation, made the strategy work.
Storage hedges, and flat-price storage as well, worked best in our study on some of the outskirts of the Corn Belt. The huge national crop weighed on harvest prices in the eastern Midwest, for example, even though yields weren’t as eye-popping as elsewhere. Ultimately, basis firmed into summer as local supplies grew tighter, thanks in part to steady usage at ethanol plants and livestock feeders that need a constant supply.
Export demand plays role
That pattern of demand is also dominant in the western Corn Belt. But the central Midwest has another source of usage: export demand. Areas feeding the river system, notably Iowa and Illinois, saw nearby basis firm ahead of river closing.
Basis got an extra push into December delivery last fall because farmers shut bin doors tight when cash prices languished at unprofitable levels. But bins opened after the first of the year, with sales deferred for tax reasons weakening the cash market, which came under additional pressure as farmers used a February rally to move grain.
Big yields in Iowa and Illinois ultimately kept basis grinding lower into summer, despite an uptick in exports. Supply overwhelmed even that fairly robust demand.
The winter rally also helped soybean storage work — but mostly for growers who unloaded inventory quickly. Though soybeans also recovered on the July rally, those selling near options expiration in June lost that chance. Eight of the nine strategies used in our study lost money from long-term storage as a result.
The only one to turn a small profit again was the storage hedge. Soybean carries rarely pay anywhere near the full cost of holding soybeans, but still provided some incentives for hedgers. Nearby soybean basis started weak at harvest and ultimately firmed into summer. Farmers were more willing sellers of soybeans early, putting the crop in the strong hands of commercial traders, who tend to make money on basis appreciation. They held on tight, forcing end users to bid up the basis to free up supplies.
With nine months or more for the storage market of the 2017 crops to play out, it’s unclear what strategy will work best. Smaller crops could strengthen basis and maybe move flat prices higher into 2018. Tailoring your strategy to your local market requires study and, likely, a little luck.
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