If you don’t have enough (or, perhaps, any) on farm storage, it may seem like a fairly good idea to pay for commercial storage at your local elevator.
You’re simply paying a fee (typically $.03 – $.05 per bushel, per month) to use infrastructure you don’t have, in hopes that price rallies and you capture the added value, right?
Let’s think about that a different way…
When storing grain, you’re essentially gambling on price.
You’re gambling that futures will rally…and that you’ll execute when they do.
You’re betting that basis will improve…and that you’ll set basis at that time to capture the additional value.
Finally, you’re assuming you’ll sell before the cost of storage eats up all the gains in futures and/or basis.
One of the biggest hindrances to using storage effectively is not having a solid plan.
If you’ve been debating whether or not you should pay to store your grain at your local grain buyer this harvest (let’s be honest, no one likes to give it up at these prices)…here are 3 things to think about:
- What’s the actual PLAN for the bushels if you put them in storage?
Please, for goodness sake, do NOT just say ‘wait for better prices’. Of course the goal is that the price increases after harvest. What I really want to know, however, is what is your PLAN if you stick the bushels in storage? What you should never do is simply place the bushels in storage because you’re not sure what else to do…that’s a great recipe for storage failure.
Example: Let’s say you’re storing to capture a better basis level. Basis is typically the worst at harvest, so it’s understandable to want to store and sell (at least on a basis contract) when basis improves. However, understand how likely it is that basis will improve enough to cover the cost of storing. Let’s say storage costs $.04 per bushel per month. If you wait 2 months, basis will have to improve more than $.04 from the level at harvest for you to come out ahead on basis by storing.
Thus, be realistic and disciplined in your plan when establishing pricing goals. - Are you putting off the inevitable, or do you have a reason to believe the price will improve?
Are you deciding to store because you refuse to accept the current market price? If so, that’s not a good reason. Rather, choose to store because you have solid reasons and market analysis that points to a market rally. If you place bushels in storage just because you think the market is wrong…you’ll probably end up eating up any price appreciation in storage fees because you won’t have attainable target prices in mind and will be inclined to store your bushels too long out of stubbornness. - After considering 1 & 2 above, are there other options that accomplish your goals without paying for commercial storage?
Here are some other options to consider instead of paying storage fees without a plan:
- Sell cash grain when you haul it in & buy a futures contract
Why/when you would do this:
You’re bullish, or believe that prices will improve.
You also would like to take the cash now, pay down some debt and reduce interest expense. Then you can take a portion of that cash and buy a futures contract(s). When you buy a futures contract, you gain, penny for penny, for every cent the market increases, but remember, if the price falls, you’ll also lose, penny for penny.
Be aware that in order to capture a gain in a bought futures contract, you will have to offset (sell the contract) at a higher price. This is why it’s extremely important to have a target price determined before you take a futures position.
Why/when you would NOT do this:
You’re risk averse and not confident that prices really will rally, or at least not confident enough to place yourself at the mercy of the market again. Remember, if the market price falls, the futures contract you bought loses value, penny for penny, with the market. Thus, if you take a loss in your futures position, your net selling price will actually be LOWER than the original cash sale price at harvest.
You also may be uncomfortable with margin calls. - Sell cash grain when you haul it in, then buy a call to take advantage of futures price appreciation
Why/when you would do this:
You feel confident futures prices will rise, but you’re not willing to take the risk of buying futures.
You’re not comfortable with the margin calls that come with taking a futures position.
You want the cash now and are willing to sacrifice the initial investment in the call in exchange for the opportunity to capitalize on market appreciation.
Note: By selling cash and buying a call option, you’ve established your floor price on these bushels (cash price – your investment in the call option). Thus, you know your worst case scenario. However, you have the potential to increase your price if the market improves, because your purchased call option will gain value and add to your net price if the market rallies.
Why/when you would NOT do this:
The call is too expensive (in which case, there are strategies that could decrease the cost but limit the upside potential). If you don’t feel confident prices will rally more than the investment in the call before it expires, it’s likely too expensive.
You’re not confident the market will rally enough to recoup the initial cost of the call option. - Store in commercial storage for a BRIEF time (2-3 months) to capture a better basis level.
Why/when you would do this:
You’re confident you can execute and capture a better basis level after harvest.
Once basis narrows to the level you’re targeting, you’re prepared to either sell your stored bushels on a basis contract, giving yourself additional time to price futures without paying storage fees, OR sell cash once basis narrows and potentially use one of the strategy options above if you still feel confident futures will rally.
To execute this effectively, you’re prepared to put in a firm offer to set basis at your target level so that you don’t second guess your decision.
Why/when you would NOT do this:
You’re not confident basis will appreciate enough to cover the monthly storage fees.
You’re afraid this will take too much discipline to set a target for basis and actually execute in that short of time frame.
Key takeaways:
- Paying for commercial storage isn’t your only option this harvest
- Having a realistic PLAN is the most important thing when it comes to storing grain
- When you have a plan, be disciplined enough to actually EXECUTE when the time comes