Storage Returns, Where Will They Come From?

USDA’s October supply/demand reports estimated that 2005 corn and soybean crops will be the second largest ever. While demand is expected to be strong, 200506 soybean carryover is expected to increase and corn ending stocks remain burdensome at more than 2 billion bushels. These large supplies and harvest deliveries are pressuring prices. Current cash bids for corn are at prices that are below USDA’s projected price range of $1.65 to $2.05 and soybean bids are in the lower onehalf of the projected range of $5.00 to $5.80. With low prices, elevators and grain bins are filling up as producers store much of these large crops.

Although avoiding harvest delays and income tax management influence decisions to store grain, the primary objective is usually capturing storage returns through higher prices later in the marketing year. The higher prices needed for storage returns will depend upon some combination of capturing market carry, improved basis, and higher futures prices. It is important to understand which of these price elements offers the potential for returns and recognize the speculative risks associated with them.

Market carry is the price premium offered by distant months’ futures prices compared with the current or nearby month futures price. The distant month price premium represents what the futures market offers to store or “carry” the grain for delivery in the later months. Although the market may offer a storage return, it seldom offers full carry or enough to cover all interest and storage costs. Market carry also serves as a market signal for nearby demand. If the deferred month futures price premium covers most of the storage costs, it suggests weak nearby demand because the market is offering to pay storage rather than take delivery. In contrast, if the price premium for distant month futures is small or nonexistent, the lack of market carry suggests strong nearby demand since the market is signaling it wants grain delivered and unwilling to pay for storage. It is necessary to own and store the grain to capture market carry. Carry can be locked in by hedging (selling the distant month futures contract). If not hedged, storing unpriced grain is speculation that the carry will still be offered in the market price when the grain is sold.

March 2006 corn futures have offered carry of 12 to 13 cents over the December 2005 contract. This almost recovers interest and storage costs for corn stored until January or February 2006, a market signal suggesting nearby demand needs are being met and encouraging storage of corn. Other distant month futures contracts (May, July) also offer market carry that offers potential for storage returns.

The January 2006 soybean futures prices offer 13 cents carry and the March contract prices have 21 cents premium over the November 2005 contract. Current prices suggest that nearby soybean demand needs are being met and the futures market is offering higher prices for later delivery of soybeans, signaling the possibility of returns to storage.

Basis (the difference between futures price and cash prices) provides cash market demand and storage signals. Current low corn and soybean cash price bids indicate a very weak basis (wide negative spread between cash and futures prices). The low cash prices suggest current cash demand needs are more than being met. Large crops, full elevators, higher fuel prices, increased transportation rates, and river transportation delays have slowed grain demand. Buyers don’t need more grain right now and they would rather have someone else store it. Weak basis is a market signal that discourages cash grain delivery and suggests potential for storage returns when postharvest grain delivery slows and cash demand picks up, causing cash bids to increase. This possibility for basis gain would add to potential storage gains offered by market carry for storing corn. Potential basis gains from unusually weak soybean basis when coupled with market carry also could offer potential soybean storage returns. However, due to the expected large production and this year’s transportation problems, basis recovery may take some time.

Higher futures prices can be captured by holding stored grain. However, while storing grain is necessary to capture market carry and speculate on basis gains, holding grain is not necessary for speculating on higher futures prices. Once basis gains and at least some market carry is captured, it may be less risky utilizing futures or options to speculate on higher prices rather than storing cash grain and incurring additional storage costs.

Once the harvesttime price lows are in, risk and uncertainty may offer some hope for price recovery. Stronger than expected soybean use or production problems in South America could tighten soybean supplies. High fuel and fertilizer costs may impact 2006 production decisions and uncertainties about crop acreages will add to market risk. World coarse grain supplies are relatively tight and shifting acreage away from corn, due to high input costs, could eventually lead to some reduction in corn supplies.

Although some postharvest futures price recovery may occur, significantly higher prices may be hard to come by. Transportation costs and demand concerns, such as the impact of bird flu on soybean meal exports, could slow exports. Many analysts believe that USDA may further increase corn and soybean production estimates in the next supply/demand reports, adding to supplies. If South American production prospects appear good, it may have negative price impact in the coming months. While USDA is projecting record 200506 corn use and near record soybean use, the burdensome expected corn carryover and adequate soybean ending stocks estimates suggest limited potential for higher futures prices.

Low cash prices caused by unusually weak basis, coupled with low prices and market carry in the futures market, supports the decision to store corn and soybean. However, it is important to understand what will produce higher prices and storage returns. Market carry and normal postharvest basis recovery appear to offer storage returns. Further basis gains may be possible if transportation costs soften and river traffic returns to normal levels. These factors provide a foundation for realistic storage return objectives. Additional price gains, especially storing for significantly higher prices, involves price speculation and considerably more risk.