Ed’s World

Questions & Answers About Grain Marketing

How much storage is the right amount?

Question: How much storage is the right amount? 100% of one crop? Corn vs Beans? Can I afford to build? Give me the long term view.

Ed replies: Let me give you the worst answer I can think of –  it depends. It depends on the size of the carry in the futures market, your willingness to sell that carry, how far your farm is physically located from a cash market, and other operational needs. I’ve done a great deal of research and thinking on the topic of storage over the past few years and this is what I’ve concluded as a “long term” view.

If you hope to make the case for building new storage on the existence of a pure market return to storage (e.g. holding cheap grain off the market at harvest for sale later in the year), I think you will have a difficult time with the economics. Last year’s harvest was a special situation: a large crop and large carrying charges in the market, very poor basis levels and then Katrina combined to put an incredible value on storage. Several years like this and you could pay for new storage quickly. But the odds of several consecutive years like this are small. Next year could be a completely different market, with small carrying charges and a strong basis and no incentive for storage. In that case you have a large investment and no return.

What I am seeing are more and more producers making the case for new storage based on a combination of marketing and operational needs. Cash grain markets and grain marketing patterns continue to evolve. Local elevators are giving way to much larger terminal facilities and processing plants (ethanol and soy crushing plants). Many producers own their own trucks and are willing to drive greater distances to find a better price. But it is nearly impossible to ship grain any distance and harvest a crop quickly. In addition, many producers find it much more economical to dry grain on the farm.

Making an economic justification for new storage must go beyond your specific needs in marketing or operations. But you may able to make the case based on a combination of these concerns.

Usset is grain marketing specialist for the University of Minnesota Center for Farm Financial Management.  See other questions and answers about grain marketing at “Ed’s World” online: www.cffm.umn.edu/publications/edsworld.aspx.  Email your own grain marketing question to Usset at usset001@umn.edu.  Usset also formulates model marketing plans and simulated sales for corn, wheat and soybeans.  His pre-harvest plans for 2006 (PDFs) can be found online at www.cffm.umn.edu/publications/mktplans.aspx.