By Jonathan LaPorte
Better market prices may be available to farms who utilize basis contracts and have the ability to store grain. The main question for your farm is: are you in a position to take advantage of these potential marketing opportunities?
The answer to that question depends on market basis and your ability to store grain at an affordable cost.
Basis is the difference between the local cash price and the futures market price. It is influenced by a number of factors. Some of these include transportation costs, local supply and demand, interest or storage costs, handling costs and profit margins. If the basis is narrow, the local market wants your grain and you should consider the factors that are contributing to the basis level and make the decision if it is the right time to sell. If the basis is wide, the local market doesn’t necessarily want you to sell grain. In this case, storing grain and considering a basis contract is potentially more profitable.
Basis contracts essentially “lock in” the difference between the futures and local markets. This may be to your advantage if you meet the following criteria: 1) you feel that futures prices will rise later; 2) the local basis is significantly lower (stronger) than recent years; 3) you’re willing to take the risk of declining prices; and 4) you have access to affordable storage.
These contracts are typically the most effective if you have to deliver grain to the elevator later in or shortly after the harvest season, when elevators traditionally have wider basis levels. However, recent market outlook reports have indicated potentially higher demands for farm commodities. Higher demand for grain may lead to higher future prices. If prices do rise, Michigan farmers may want to monitor local grain prices to check if basis levels are worth locking in at their local market.
For more information on basis contracts, review Iowa State University’s bulletin FM1891 – Understanding Risk in Basis Contracts.
Cost of grain storage
The cost of storing grain depends on the on-farm or commercial rental facilities available to you. If you have on-farm storage, the costs include dryers, fans for aeration, the fuel or electric to run the equipment and possibly labor. There may also be additional transportation or handling costs that need to be considered.
To calculate your farm’s storage cost, Iowa State University has developed a calculation tool for side-by-side comparison of on-farm to commercial storage. Commercial storage sets a base rate ($$/bushel) that includes the same costs as on-farm storage and a premium for providing the storage service. The calculation tool can be on the Iowa State University Cost of Storing Grain webpage.
Cash price on delivery date
Once you have calculated the farm’s storage costs, subtract these costs from the expected price on delivery. This will give you a price comparable to today’s cash market.
Compare the expected cash price on the delivery date to the cash price offered today. Is the expected cash price better than the price offered today?
If the expected cash price is higher, then storing grain is profitable and should be considered. The question now is, how much grain can you store?
Storage availability concerns
For those farms expecting average to above average yields, the availability of storage may be a limiting factor. On the other hand, farms expecting lower yields may not have enough production to fill their current storage and these empty grain bins may present an opportunity for farms in need of additional storage. If an area saw reduced production from 2019 due to delayed or prevented planting, there may be a significant amount of storage available.Source : msu.edu