On-farm storage can offer farmers profit, flexibility

Drive through the rural Midwest and it is evident that some farmers are relying less on elevators.

New silver bins shine in the sun. In a time of low commodity prices and lots of grain, it would appear building on-farm storage is a wise choice. 

Or is it?

Steve Johnson, an Iowa State University Extension farm management specialist, said it is a good time to talk about on-farm storage. The world has more ending stocks of grain than it has had in 30 years. Moreover, storing grain commercially in these prices can seem like a losing battle as storage costs add up.

“There is, in essence, more bushels trapped in commercial storage than we have ever had and it is not paying off and farmers are frustrated,” Johnson said.

But, he added, farmers should invest in on-farm storage for the right reasons. Some good reasons for building grain storage include:

1. Harvest efficiency. By building on-farm storage, farmers don’t have to sit at the cooperative with their grain or wait for the local elevator to open.

2. Lower drying and shrink cost. Regarding corn, farmers can dry and shrink it much cheaper than the elevator.

3. Capture the futures carry by holding bushels postharvest. Some farmers this year have captured 30 cents a bushel by storing it until July. “Then the carry helps pay for those bins,” Johnson said.

4. Improved basis. Basis—the cash prices, minus the nearby futures—is usually the weakest at harvest, when supplies are plentiful.

5. Flexibility. Farmers can spread cash sales and grain delivery.

Johnson, however, warned farmers shouldn’t build for No. 5 on the list alone.

“The bottom line is, improve your marketing before you build a bunch of grain bins,” Johnson said. “Let’s pay for these grain bins with carry and a better basis. We can pay for these grain bins, but it means you have to change your behavior and that is having an improved marketing strategy.”

Don’t buy your way out of financial woes

Getting the most from on-farm storage requires careful planning, Johnson said. 

For starters, farmers should consider whether they can afford on-farm storage—especially amid the current farm crisis.

“Here’s the problem,” Johnson said. “Most farmers have depleted their working capital. With current assets and current liabilities—most aren’t in a good spot to build storage. The decision to build storage should have been 10 years ago.”

Buying your way out of low prices isn’t the answer if you have bad marketing habits. It costs about $2 a bushel for steel to build a bin, he said.

“If you are going to pay for it in the five items listed above, if you can justify those five items, then we can pay for grain bins,” he said. “Storage has a place, but you are going to have to recognize, if you have working capital constraints, you better talk to your lender.”

Storage hedge has its place

In Iowa, Johnson recommended farmers shouldn’t leave too much of their grain unpriced at harvest.

He also discourages farmers from storing grain for multiple years. Some lenders might not approve lending money to build storage just to hold several years of grain without a sufficient repayment and marketing plan.

A storage hedge has its place, said Daniel O’Brien, a Kansas State University Extension agricultural economist. Storage hedges protect against changes in the overall level of market prices. They also still allow the producer to speculate on the basis and capitalize on a strengthening basis if it should occur. Those who choose not to set the basis for futures sales of their grain may see rewards.

However, he said, there are risks. O’Brien discouraged storing grain just out of habit. Each year farmers should evaluate the economic incentive to store unpriced grain. For instance, wheat farmers might use their best judgement about how far cash prices might rise in the future, taking into perspective potential turmoil from weather or production issues in other countries. Also, consider U.S. wheat export movement prospects.

And, said O’Brien, farmers with superior quality wheat might be able to hold on and store for better protein premiums later in the post-harvest period.

“There are some things we can do managerially to increase our opportunities to capture a higher selling price,” the economist said, adding, “That is the risk Kansas ag producers, particularly growing wheat, look to take when they are making those on-farm storage decisions.”

Commercial storage

For those storing grain at the elevator, Johnson gives his perspective from Iowa.

Storage costs are around 5 cents a bushel. Meanwhile, there is a cost to the lender just in interest.

“In most cases, the last three years, farmers should have sold (their crops) at harvest and kissed them goodbye rather than sold them in the spring and summer months waiting for higher futures and better basis,” Johnson said. “We’ve waited for four months for higher futures and better basis that is few and far between. It is because of the large ending stocks and we have too much local supply.”

He said he could see a 2-million-bushel grain pile on the ground out his window. He didn’t expect to see any movement from it until July or August.

“Piles mean there is too much local supply for the amount of demand,” he said, adding in storage costs alone, “a farmer who is holding corn in commercial storage, they need an extra 30 cents to break even.”

On-farm storage works to even out the flow of wheat supplies to users and it is affected by changing basis levels through time, O’Brien said. 

“We often forward price grain to help us decrease the risk and potential damages of large crop—low price years,” he said. “The thing we are aiming for in a lot of years is to figure out when and if the local wheat basis will narrow due to supply-demand factors.” 

Do your research

O’Brien recommends having a marketing plan before harvest, then checking it again after harvest and every few months down the road. If market conditions change, then you can adjust the plan.

To formulate that plan, do your research, he said. Check U.S. Department of Agriculture reports regarding crop production and markets.

Also, K-State’s website, AgManager.info, has detailed reports on an area’s historical basis patterns going back to 1998 for some elevators.

Scrutinizing seasonal patterns in historical basis levels helps farmers determine if on-farm storage will pay for itself over time, O’Brien said. From those reports, farmers can see the pattern over several years of when the basis narrowed.  

Where are you located?

Figure in trucking costs to key demand centers in the region, O’Brien added. How far is it to the nearest soybean crushing or ethanol plant or the flour mill?

“Are you near any of these demand centers that will need to have grain offseason after harvest?” asked O’Brien. “These centers need to have a consistent flow and availability of grain for use off-season after harvest.…These typical, repetitive market factors can really help the local grain basis in the post-harvest period.”

Business decision

There is no right or wrong answer regarding the judgment to build storage to retain title of grain after harvest for later sale, O’Brien said.

“It is a business decision and you are weighing the risks and rewards of doing so,” he said. “On-farm storage is not for everybody for sure.”

However, farmers with bins on their farms are typically in a better position to manage their grain sales over time and use their marketing expertise, thus positively affecting their bottom line.

Amy Bickel can be reached at [email protected] or 620-860-9433.