To Store or Not to Store?

By Katie Micik
DTN Markets Editor

OMAHA (DTN) -- To store or not to store? That's the question farmers need to put more thought and management into, according to South Dakota farmer and broker Tregg Cronin.

The grain bin building boom has made the answer seem almost predetermined: Of course farmers are going to use the shiny circles of steel they've invested so heavily in.

Cronin thinks the "set it and forget it" approach -- putting corn in the bin and not thinking about it again until spring -- can be incredibly costly.

"We have to get away from that," he said.

Farmers first need to ask themselves if storage is the best choice economically. If it is, they need to consider the varying expenses associated with storing corn on the farm, at the elevator or "storing" it using futures contracts and selling the cash grain.

Many farmers draw a blank when asked what it costs them to store corn on-farm, Cronin said, but it's an essential question in making a good decision on storage. The bin itself is a fixed cost, but then there's interest, drying expenses, etc.

What farmers often don't think about is the opportunity cost: What other investment opportunity is the farmer giving up to keep grain in that bin? Could he invest somewhere else, or buy the grain back with futures contracts?

Cronin cautions that sometimes the opportunity cost can be more expensive than any physical cost involved.

"In the environment we're in now, the basis and spreads are a much bigger percentage of your cash price than they were a few years ago when corn was $6 a bushel," Cronin said. "Farmers really have to get back to paying attention to every single penny and focusing on -- I don't know if I'd call it the little things -- but the things that have been glossed over."

That means evaluating their storage decisions on a monthly or weekly basis. That takes more work and analysis.

DTN Senior Analyst Darin Newsom said it's important to remember some of his basic marketing rules while managing that cash grain position.

First, don't get crosswise with the trend. While some try to explain this colloquially as "the trend is your friend," Newsom said it's more helpful to think about it in terms of Sir Isaac Newton's First Law of Motion.

"A trending market will stay in that trend until acted upon by an outside force," Newsom said.

That outside force is usually speculative or noncommercial traders, but there's little indication those traders see much interest in the corn market with the current large crops, strength of the dollar and low volatility. It's likely to stay in that range until noncommercials change their mind.

The second rule farmers need to consider is to let the markets dictate their actions.

"That's where it gets difficult," Newsom said. "If you let the market dictate your actions, what's it telling you to do?"

When the market's in a carry situation, which means that subsequent futures contracts are priced higher than earlier issues, it's a way of telling farmers to hold their grain for a later sale.

Yet, the current carry from the December to March corn contract is small, about 6 cents as of Monday afternoon. That's unusual, Newsom said. After harvesting three, 13-plus billion bushel crops in a row, the futures spread should be wider.

"Is demand stronger than expected and is being reported? Or production maybe wasn't as big as what is being reported? Or are we just in a little bit of a blip, a marketing anomaly, where everything is locked up tight?" Newsom said. "Producers are trying to force the market higher, and the market, short term, may be trying to buy some supplies. It's a strong possibility."

It could also be a combination of those factors.

"The market's telling me one thing, but implying another. In the context of today's markets, where basic futures prices aren't doing anything and the basis is firming, it all depends on what (marketing) you've done before, and rule No. 3, if you can manage your margin risk."

Newsom said he's seen some excellent marketing plans go up in smoke because they couldn't make the margin call.

"It's easy to put grain in a big white bag or bin and worry about it next spring," Cronin said. "It's a lot more difficult to manage the position every week for the next six months. It's more work, but its worthwhile work in what it means to the final price you receive."

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Editor's Note: Hear Tregg Cronin and Darin Newsom discuss "Tools for a Carry Market" at the DTN-Progressive Farmer Ag Summit Dec. 7-9 in Chicago. For details and registration go to www.dtnagsummit.com

Katie Micik can be reached at katie.micik@dtn.com

Follow Katie Micik on Twitter @KatieMDTN

(AG/CZ)

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