By Elaine Kub
DTN Contributing Analyst
Now that we've been firmly back in the universe of abundant crops and low crop prices for a while, it seems that free storage and delayed pricing programs are a thing of the past. It's one of farming's ironies that when prices are profitable and you don't really need to wait to price grain, grain companies are happy to let you put off doing so. Yet when prices are low and you're desperate to hold out for an expected seasonal bump, grain companies will charge you an arm and a leg for the privilege.
I've seen some delayed pricing programs ("DP charges") offering to let a farmer put off setting a price on the grain he delivers to an elevator, as long as he is willing to pay 10 cents per bushel per month until he makes that decision. Some programs only charge a large fee like that for the first month or two after harvest, then pare back to something like 3 or 4 cents a month. Some programs have a simple daily charge or monthly charge of 3 or 4 cents per bushel with no minimum and no upfront fee. Even condo storage programs, wherein a farmer "rents" storage space from a commercial grain company, typically work out to 3 or 4 cents per month. And those prices may be a pretty good deal, but no matter how it's designated, if a farmer deposits this year's grain somewhere other than in his own private bin, he must pay.
These prices are set by what the market is willing to bear. A farmer may feel that a DP or storage fee is a fair price to pay for the convenience of simply bringing his grain to town and not messing with bins and trucks over the winter and spring. And if a particular elevator's charges get too high, well, in theory, the farmers will take their grain elsewhere or maintain upside exposure to seasonal spring grain prices with futures or options instead of physical grain ownership. If a farmer chooses to store his grain in his own bins, he will have labor costs, plus energy costs to keep the grain in condition, plus the costs for the equipment itself, plus insurance, plus the shrink losses on the stored grain over time.
Those are the same costs that the grain companies are recouping when they charge their DP and storage fees. The classic grain storage equation says that the full cost of carry is the sum of the real storage costs (discussed above) plus the interest costs of keeping grain off the market for a period of time.
In today's market, the real physical costs for commercial grain storage could be something like 0.0015 cents per day, or 4.5 cents per month, or let's say 13 1/2 cents for three months between harvest and a potential spring sale. In a DP program, the commercial grain company immediately takes title to the grain and could immediately load it out on a train and receive revenue for it. But they are within their rights to also consider the interest costs of delaying revenue from one month to the next.
So when a farmer pays a grain storage company 10 cents to store his grain for a month, he is reimbursing them for their costs to finance, build, operate and staff their elevator, bin or bunker. Fine. He's also paying some profit margin to the grain company, which is also fine. But he should realize he is paying TWICE for the interest costs -- once to reimburse the grain company for its interest costs as it defers revenue, and again to defer the revenue for his own operation.
Let's say a farmer delays pricing 5,000 bushels of corn, presumably worth $4 per bushel, for three months after harvest. He could think of this as foregoing the opportunity to receive interest on the $20,000 he could have put in a savings account during those months (at a negligible interest rate these days). Or he could think of it as the interest charges he will keep incurring on an operating loan during those months while he waits for the revenue. At a 4.5% interest rate, to delay three months before paying down a note by $20,000, for instance, would incur an interest cost of $221 (i.e., another 4 1/2 cents per bushel during the wait), equivalent to 1 1/2 cents per month in interest-related carrying costs.
That's why thinking about the storage equation is relevant this week. There's a decision pending from the Federal Reserve -- will they bump up the federal funds rate, or won't they? If they do, some ag loans tied to that benchmark will immediately be affected. Even private ag lenders who set their own rates will cautiously consider their terms for next year's business, as the whole universe of short-term borrowing will be shifted toward higher rates.
Now, don't panic. If all the interest rates get shifted up by 0.25 percentage point, then the interest portion of corn-carrying costs in our example here would only increase from $0.0147 per bushel per month to $0.0156 per bushel per month. Even if interest rates go up a full percentage point, and we look at soybeans with naturally higher revenue per bushel, the interest cost of carrying a bushel for one month might increase from 3 cents per bushel now (at 4.5% interest) to 4 cents per bushel (at 5.5% interest).
Those costs must increase, and even if the Fed doesn't hike up those rates during Thursday's meeting (which they might not), they will have to hike them up eventually. The rates aren't very likely to go down from zero.
There will be more pressing concerns in the agricultural markets if interest rates go up -- land prices may become volatile, the U.S. dollar might rise and put pressure on grain prices -- but this is an important detail of the farmer's toolkit as he looks at his marketing alternatives and thinks about selling at harvest or storing the pain for later.
Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at [email protected] or on Twitter @elainekub.
(AG/CZ)
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