The recent USDA reports have been released and they have tallied their influence on price direction. The carryout numbers have fluctuated from previous in these reports and will likely fluctuate again when the next reports are released. The projections seem to point to significant carry-outs. Such excess production will likely stress the harvest storage capacity, both on-farm and commercial storage assets.
A look back at some history reminds of the “cheap food” policies of the 70’s, which led to carry-outs that challenged our ability to store excess grain production. At that time, the federal government prepaid producers to “find a way” to store grain.
It is unlikely the government will return to the policy of paying for storage.
Today, as the rest of the world (Ukraine-Russia-South America-and others) increases production, the U.S. producer is again tasked with “finding a way” to store excess world production until domestic end users require it or until the rest of the world needs it.
The task to store the world’s excess supply is often viewed as an unwelcomed and expensive responsibility. The alternative would be to underprice the rest of the world, encouraging others to purchase our production during harvest. The economics of supplying grain at the lowest price in the world would also be detrimental to our balance sheets.
For the U.S. producer, when the world has poor crops, the market will signal producers to deliver grain through narrowing basis, decreasing future spread carry, and higher prices. On the other hand, when the world has good crop production, harvest delivery of grain will likely be met with a widening basis, increasing futures spread carry and low prices.
These are market signals to store grain.
Planning for wide basis, low prices and storage shortages can seem the more difficult task. But there’s an upside to these challenges. The ability to store excess supply of grain can offer revenue opportunities. CME Futures contracts are designed to allow grain warehousemen the ability to extract revenue from the futures market when the users of grain do not need or want it.
Other countries do not have the benefit of low interest rates, stable currency, and legal protections available to U.S. hedgers. Those factors provide the foundation to shoulder the responsibility to store the world’s excess supplies and implement a consistent, reliable process to extract payment from the market when storing grain.
How elevators do it
Country elevators have become skilled at extracting this revenue with an understanding of merchandising principles. It has often been stated that producers need to manage their storage asset and extract storage revenue the same way commercial elevators do. This is only partially correct. Country elevators can manage price risk much more efficiently than the producer. Commercial elevators will not pay more for grain than it is worth, which is not always the same as producers, who are often faced with prices at levels below the cost of production.
This price volatility risk adds another complex layer to producers looking to extract storage revenue from the market.
Farmers who develop the ability to correctly apply merchandising principles will have a competitive advantage over the long term.
Changing world production trends can overwhelm a marketing plan. Yearly profitability is always the goal, but experience has proven it may not always be an achievable target.
The good news is, regardless of whether the world has large crops or short crops, or regardless if storage is or is not available, your marketing objectives can remain the same.
- Be positioned for upside every year – it can be opportunity to build equity.
- Have the discipline to establish floor prices every year – it can limit excessive equity losses.
- Manage a storage asset (or lack of a storage asset) to extract market revenue (or minimize the cost of a lack of storage) during times when the market does not require your grain.
The time is now to develop the ability to read the market to capitalize on potential revenue it can provide for stored grain. The Futures market will pay you for your storage facility, but it is also very willing to allow you to do it for free if you do not take the time to understand the process. Find someone you trust to develop and instill an understanding and an ability to correctly apply required marketing and merchandising principles.