Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
August 4, 2000

The Real Reasons for Grain Storage.

Most producers want to avoid selling at low prices. Prices are often low at harvest time and it appears that will be the case again this year. To avoid these low prices, grain is stored in hopes that prices will improve--"store and hope!"

There are at least three reasons for storing grain: postponing taxes, avoiding harvest delays and capturing higher prices. Delaying sales to manage cash basis income tax is often a business reason for storing, but it not necessarily a good marketing decision. Avoiding harvest delays with longer hauls or waits in the elevator line are often reasons for using on-farm storage. Drying grain in bins to avoid moisture discounts may also contribute to storage decisions. However, most will likely say that the primary reason is storing (hoping) for higher prices.

Higher prices result from higher price levels in the futures market, improved cash market basis and capturing market carry (the difference between nearby and distant month futures). It is important to understand that storage isn't necessary to capture higher price levels in the futures market! In fact, using futures or call options to speculate on futures price gains avoids many of the risks and costs associated with storing cash grain (grain quality and condition, storage and handling costs, insurance and interest). This really leaves only two marketing reasons for storing grain--capturing basis gain and market carry.

Basis is usually weakest (widest) at harvest time and often quickly recovers after the harvest crunch is past. This recovery can provide a significant improvement in cash price even if futures price doesn't increase. Basis gains can only be captured in the cash market and this may require storing the grain. However, once this basis recovery occurs, there is often little left to be gained in the cash market by continuing to store.

Market carry is the premium distant month futures contracts offer us to store or "carry" the grain for later sales. This gain can only be captured by forward contracting, selling futures, or speculating on stored grain. It cannot be captured if we sell at harvest and re-own with futures or options, since by paying the premium for a distant month futures contract we in effect "pay someone else to store."

Speculating on basis gains and capturing market carry may offer the best opportunity to get a return on storage. This usually occurs by mid to late winter--sometimes earlier. Continuing to store grain after basis gains and, at least, some market carry can be captured is very risky. At this point, if higher price levels are still anticipated, speculating on higher prices can be better accomplished by using the futures market. --Melvin


University of Missouri ExtensionDecisive Marketing - August 4, 2000
http://outreach.missouri.edu/agconnection/DCT/DM000804.html -- Revised: April 20, 2004
breesm@missouri.edu