How To Use Storage As A Marketing Strategy

Deciding how long to store grain depends on grain condition, cash flow needs, storage charges, interest rates, price level, basis levels, your market outlook, and delivery opportunities, just to name a few. Storage is profitable if prices rise enough during the storage period to cover storage and interest costs.

The first consideration is storability of the grain. Representative samples should be taken of grain as it is binned, and the moisture and temperature of these samples should be recorded. By doing so, a base is established for monitoring temperature and moisture of each bin of stored grain. As most farmers know, the higher the grain temperature and moisture level when binned, the greater the risk of mold, heating and insect infestation. Also, temperature (and moisture) migration occurs in the bin as outside temperatures change.

Many farmers now use aeration and monitoring systems to assist in safe grain storage. If significant downgrading or volume losses are expected because of a less than ideal storage set up, you may be better off taking a lower price and moving the grain than risking major spoilage or quality downgrades.

A second consideration is cash flow needs. There are four main sources of cash inflow: income from farm operations, capital sales, borrowings, and other (including personal) income. Similarly, there are four main areas of cash outflow: farm expenses, capital purchases, principal repaid on loans, and nonfarm expenses (including personal living costs).

One alternative to selling physical grain is to use the Advance Payments Program (i. e., borrow against the stored grain). Through this program, farmers are eligible to receive an advance on stored grain up to $400,000, with the first $100,000 being interest free. Borrowing against the stored grain is a way to bring in cash flow while postponing the actual grain sale for whatever reason (e. g., too busy now, limited delivery opportunity, expect the grain price to be higher later). Of note is that the advance is considered a loan against the grain, and is not taxable income until the grain is sold.

Unless a farmer is paying for storage in a commercial facility, the storage cost is usually limited to the investment cost and depreciation on the farmer s own bins and related storage equipment. This physical storage cost is typically 10 to 30 cents per bushel a year, depending on the facilities.

A more significant cost can be the interest cost of storing grain, and this will vary by individual farmer circumstance. Generally, the interest rate used is the opportunity cost of money for that farmer. This is either the highest interest rate on any loan outstanding or, if debt-free, the highest return that could be obtained from a low or no risk investment. For example, if canola is worth $12/bu., a farmer with outstanding trade account debt accruing interest at two per cent per month would have an interest cost of storing that canola of 24 cents/bushel/ month or about $1.50/bu. in just six months. In other words, with a price of $12/bu. now, and with that trade account outstanding, this farmer would need about $13.50/bu. six months later to justify the interest cost.

Another farmer who has no debt, and with the current low rates on savings, may only need 10 cents a bushel higher price to cover the interest costs of storing $12/bu canola for the six months. In both cases, use of at least the interest free portion of the Advance Payments Program would make financial sense.

Usually, harvest-time grain price bids are relatively low. There is typically an abundance of supply and less commercial grain storage than several years ago. Because grain buyers do not have difficulty attracting product at harvest, they do not have to bid aggressively. For products like canola with an actively trading futures market, the harvest-time basis, or discount below the futures price, is often relatively weak. The market signal during these weak price and weak basis conditions is to store, and wait for a stronger price and/or a stronger basis.

I recommend following markets using more than one information source. With that market information and, with attention to your costs of production, profit level and cash flow needs, sell in stages into a rising market rather than try to pick the market top.

Nobody knows when the market will peak, and therefore one should not be discouraged because prices move higher after a sales decision. Some farmers create written marketing plans, which break the marketing of their crops into portions. For each portion to be marketed, each marketing alternative available for that crop would be considered. The plan would include decisions on each crop, incorporating timing of cash flow needs, what proportion of the crop to target at various prices, timing of those targets, and reasons for the price expectations. This way, it is much easier to periodically review and reconsider the plan. Not only is it easier to refer to a written plan than one in thought only, but it is more difficult to change the plan on a whim as markets fluctuate.

Storing grain to some extent is necessary. Storing grain as a marketing strategy can be very profitable, but knowing about the programs and pricing alternatives for each grain is necessary to make informed marketing decisions. For those grains with a futures and options market, there are additional pricing alternatives that will be addressed in other articles this winter.

NeilBluewritesfromVermillion,Alta.Contacthimat780-853-6929

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