Three reasons frequently given for storing grain are postponing taxes, avoiding harvest delays and capturing higher prices. Delaying sales to manage cash basis income tax is often a business reason for storing, but it is not necessarily a good marketing decision because delaying sales might pass up excellent pricing opportunities. While it usually doesn't apply to commercial storage, avoiding harvest delays with longer hauls or waits in the elevator line are often reasons for justifying on-farm storage. Drying grain in bins to avoid moisture discounts may also contribute to on-farm storage decisions. However, whether the storage is on-farm or commercial, most will likely say that the primary reason for storing is expectations (hoping) for higher prices. Grain storage captures higher prices in one or more of three ways:
Grain prices are "discovered" in the futures market through price action resulting from the world wide supply and demand forces. Local cash prices are determined in part by the futures contract month nearest the delivery date of the grain. Storing grain can be used to speculate that price action (technical factors) or supply and demand (fundamental) factor changes will increase futures price, resulting in higher cash prices. Since these are futures price gains, buying futures contracts or call options can just as easily capture them. In fact, selling cash grain and re-owning with futures or call options avoids many of the risks and costs associated with storing cash grain (grain quality and condition, storage and handling costs, insurance and interest). These reduced storage risks may offset many of the concerns of using the futures market (margin calls, option premiums, Internal Revenue Service definitions of speculation, capital loss limitations, etc.). Price risk or rewards, resulting from supply and demand at work in the futures market, is the same regardless of whether cash grain or paper is held. If storage isn't necessary to capture higher price levels in the futures market, this really leaves only two marketing reasons for storing grain--capturing basis gain and market carry.
The spread between the futures price and the local cash bid is basis. Basis represents the local market's price adjustment for transportation, local or regional demand, local supply and other factors. Basis is usually weakest (widest) at harvest time and often quickly recovers after the harvest crunch is past. This recovery can provide a significant improvement in cash price even if futures price doesn't increase and can only be captured by making cash sales. For example, Central Missouri harvest time corn and soybean basis has been especially weak the past two years (1998 and 1999). This weak harvest basis was followed by recoveries of $0.14-$0.20 per bushel for both soybeans and corn by early to mid winter. These gains contributed greatly to short term storage profits. Similar patterns appear to be developing for the 2000 crops with a very weak harvest time basis.
Basis gains can only be captured in the cash market and this may require storing the grain. However, once this basis recovery occurs, there is often little left to be gained in the cash market by continuing to store. Any further price gains mostly depend upon a futures price increase and there is increased risk of basis weakening which did occur in the 1998-99 soybean marketing year. During the 1998 October harvest period, Central Missouri soybean basis averaged minus forty cents (cash bids forty cents under nearby futures). By January 1999, Central MO basis had narrowed (strengthened) to minus twenty-five cents. In late spring 1999, central MO basis again weakened to minus thirty-five cents and never recovered significantly for the remainder of the marketing year. Those who stored soybeans too long had significant losses resulting from a weaker basis along with increased storage costs and speculative losses associated with a declining futures market.
Market carry is the premium distant month futures contracts offer to store or "carry" the grain for later sales. Forward contracting, selling futures, buying put options or speculating on stored grain can capture market carry. The grain must be stored. Selling at harvest and re-owning with futures or options cannot capture market carry, since by paying the premium for a distant month futures contract in effect "pays someone else to store." Hedging (selling futures) allows locking-in the market carry, but gives up speculation on higher prices. Forward cash contracting the grain also locks-in the market carry, but gives up speculation on higher prices and basis gains. Buying a put option may lock-in a portion of the market carry and still allow speculation on higher prices, but the option cost may offset the advantages.
Speculating on capturing basis gains and market carry may offer the best opportunity to get a return on storage. Higher futures price levels may be captured in either the futures market or cash grain markets. Speculating on basis gains and capturing market carry requires holding on to the cash grain. Capturing basis gains can often be accomplished by mid to late winter--sometimes earlier. Continuing to store grain after basis gains can be captured is very risky. At this point, at least, some market carry can usually be captured. If higher price levels are still anticipated, then speculating on higher prices may be better accomplished by selling the grain and using the futures market. Some market carry may be given up, but this is offset by reduced storage cost and basis risk.
The CCC (Commodity Credit Corp.) marketing loan provisions can provide price insurance or offer price enhancement potentials for stored grain. Placing grain under loan or maintaining LDP eligibility effectively insures price at the county loan price, since the loan can be redeemed or the LDP collected to result in a net price at approximately the loan price. However, producers often pass up the "price insurance" strategy and use the LDP as a speculative tool. Claiming the LDP when prices are low and basis is weak, nets a larger LDP payment. If prices increase, due to a price rally and/or basis improvement, the grain is sold at a higher price and the LDP is used to enhance the selling price--producing a net price in excess of the loan price.
As long as prices are below loan price, the LDP captures some or all of the weak basis and may provide a unique marketing opportunity. For example, claiming the LDP during harvest when basis is normally weak captures this weak basis. In addition, holding the cash grain until basis recovers also captures the basis gain. In this case basis gain is captured by both the LDP and with the stored grain, effectively enhancing any price gains. While this is a speculative strategy with unprotected downside price risk, it has been used successfully by some producers the past two years. This strategy produced net soybean price of $6.00 or more for some Central Missouri producers for the 1998 and 1999 crops. The key has been short-term storage for only long enough to capture a strengthened basis. This occurred by early to mid-winter in both years. Storing longer, speculating on higher futures prices with stored grain, incurred significant losses as prices declined and/or basis weakened. These declines along with added storage costs often resulted in net prices well below county loan prices.