For good or ill, the Federal Reserve is committed to raising interest rates until inflation falls to 2%*. Painfully, with the current inflation level of 7.75%** as of October 31, this means that many of the costs of operating your farm will likely continue to rise for the foreseeable future. To add insult to injury, the cost of money is rising at the same time for important line items like equipment loans and lines of credit. In this environment, you may be wondering whether you price and deliver on your current hedges and HTAs, or if you should roll them out to a later delivery date. To help assess the answer for your specific situation, consider all the factors associated with storage, including the cost of grain storage and maintenance; the opportunity cost of your money; the potential for carry in the market; and your delivery logistics.

 

The First Step in a Sell vs. Roll Decision: Calculate Storage Costs

 

Add up all your potential maintenance costs and convert them to a monthly per-bushel cost. This will help you understand how much your bottom line is affected each month you hold onto your grain.

Remember, every month you wait to sell, the more future prices need to rise to offset storage costs.

 

The Costs of Maintenance: Does It Make Sense to Wait?

 

It’s rather straightforward and easy to assess storage costs at the elevator. Bottom line, elevators usually charge storage fees of 3-5 cents per month to cover the maintenance and cost of equipment to store grain and maintain quality. If you store at the elevator, take a look at your contract to see how much you’re being charged.

 

If you own your bins, the math is less obvious. You may be thinking to yourself, “I already paid for my bins, so I don’t have to pay any new storage costs.” At moments like this, it’s important to remember what our parents taught us: nothing in life is free. While you already spent the money for the bin site on your farm, it also costs you money year in and year out to maintain your facilities and to protect your grain quality. Here are a few costs you should think about:

 

• How much do you anticipate spending this year on doing repairs on your storage facilities to maintain quality?

• How much will it potentially cost to purchase or repair any of your fans?

• How much in electricity does it cost to run your fans?

• What is your typical spoilage?

 

Step 2: Layer in the Opportunity Cost of Money

 

On top of storage costs, calculate opportunity costs of an alternative use of money vs. keeping it invested in corn, like:

• A loan: do the interest costs outweigh the potential return on your crop, or

• The market: is another commodity or investment within your risk profile more likely to earn a more lucrative return, or

• A savings account: could you park your money in an interest-bearing account?

Remember to layer these costs onto your storage costs as part of your evaluation.

 

The Opportunity Cost of Money: Is There a More Lucrative Place to Invest Your Dollars?

 

The next cost to layer into your “sell or roll/store” decision is the opportunity cost of money. You may well be asking yourself, “What is the ‘opportunity cost of money’, and why is that important?” Bear in mind that the corn in your bin is more than simply grain; it’s a liquid investment that is equivalent to real money. Holding grain in the bin is akin to keeping your money in a non-interest-bearing account where the rate of return is directly tied to the commodity markets. 

 

In light of this, you should be asking yourself what the best use of that investment is in today’s environment. Is the best potential for that investment right where it is, invested in corn? Should you pay down an operating loan? Or should you invest that value somewhere else, such as a stock or a CD in order to earn a return? Bottom line, is the potential for a better incremental net return on corn better than alternative uses of your investment dollars?

 

To calculate this opportunity cost, consider realistic alternative uses of your money rather than staying long in corn. For instance, say you are considering the opportunity cost of an investment earning 3.8% per annum, the current average 30-day lending rate. At a bushel of corn valued at $6.60 multiplied by the 3.8% rate, the estimated opportunity cost equates to 25 cents, or a little over 2 cents per month.

 

Here’s an alternative that probably strikes a bigger chord. Say you have a line of credit with a rate close to the Prime lending rate, currently around 7%. The opportunity cost for that loan on a per-bushel basis equates to $6.60 multiplied by 7%, which is a cost of 46 cents per year per bushel, or almost 4 cents per month. Remember, you would also have storage costs to layer on top of this. For the sake of this hypothetical, say those costs are 3 cents per month. That means for each bushel, you would need to earn an incremental 7 cents per bushel each month to cover the costs of paying off the loan in the future rather than today.

 

Carry in the Market: Is This Your Best Chance?

 

Carry represents a positive price difference between a deferred delivery time frame and a nearby or “spot” delivery time frame. Think of it this way. You’re a buyer and you want grain — just not today. You want it later (like tomorrow, next week, or next month) and you’re willing to pay more to get it then. That extra you’re willing to pay for a later delivery? That’s carry.

 

Assessing Carry in the Market Is the Next Step to Making a Roll vs. Sell Decision

 

Think about Holding in a Normal Market

If you have stored grain, either commercially or in your own bin, and there is enough carry in the market to cover your cost of storage and money, then consider rolling your contracts to maximize the return on the value of the grain being stored. After all, the bins need to pay for themselves, and you built them to maximize the return on your grain.

 

Think about Selling in an Inverted Market

If the market is inverted, or if there isn’t enough carry in the market to cover the cost of storage and money, consider delivering on any current nearby contracts and rolling any deferred contracts back to the nearby to maximize the use of your money and capture the positive spread difference (if there is any). If the market is inverted and you have unpriced grain, consider liquidating enough to be within your risk tolerance and use the proceeds where most appropriate for your operation.

 

Supply and demand are the primary drivers that determine how much carry, if any, is in the market. As demand ebbs and flows, the need for buyers to “pay up” for supply or discount to keep from getting too much creates a chain reaction throughout the market. This applies to both the futures market and the cash market. Bear in mind that a difference in basis between two different delivery times may vary widely, thereby creating a cash market inverse where there isn’t one in the futures market, and vice versa.

 

In extreme situations where there is strong demand and little supply, the market may “invert” and pay more to have product delivered today than it will if it is delivered tomorrow. One thing to keep in mind is inverted markets imply strong demand and the need for grain now. Holding unpriced grain for better prices in an inverted market without a backstop can be risky since, on paper, prices get cheaper as time goes by, and this creates a headwind that the market must overcome to pay off.

 

Logistics: Aligning Delivery with Basis

 

Lastly, consider your logistics. Are you able to deliver in a specific time frame when basis may be historically strong in your area? If so, and you’ve determined there is enough carry in the market to compensate you, consider rolling your contracts to those time frames to maximize your return. If your logistics are constrained or quality may become an issue for you, consider the risks and possible cost if you do roll into a carry. Will the added revenue be enough to offset the risks and additional cost to deliver? If not, stay with the original time frame and deliver when most convenient and equitable for your situation.

 

It’s All About the Math

 

Why buy something if you’re not going to use it? Generally speaking, the answer requires just good common sense.

 

When it comes to your storage capabilities, however, it’s good business sense to think about storage as offering you the potential to maximize your price in those times when the math is in your favor. With that in mind, your sell vs. store decisions should be made by calculating your real costs and commitments and comparing them to potential market outcomes. Considering all the factors that contribute to the costs of storage are key to helping you make the best decisions for your operation.

 

We can help. At Total Farm Marketing, we understand the importance of using math and analysis—not emotion—to assess the market and all the factors that affect your farm operations. If you have any questions about assessing your decision to store or sell, market conditions, or anything related to the price you’re building for your crop, call us.

 

If you have questions on how we can help, reach out to one of our consultants at 800.334.9779 or visit us at TotalFarmMarketing.com.

 

 

 

*Federal Reserve Board – Federal Reserve issues FOMC statement
**US Inflation Rate (ycharts.com)

 

 

 

©November 2022. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency and an equal opportunity provider. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. A customer may have relationships with all three companies. TFM360 is a service of Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC.