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 For some farmers, this includes hedging on 'the Board.' In the
best case scenario, one buys cheap corn on the board at harvest,
sells it at a higher price well after harvest, then sells the cash
crop at current market value. The concept is that the net gains on
the board will supplement the cash price and increase profits
considerably. However, this can easily backfire if crop prices don’t
raise on the board and cash prices fall.
In “playing” the markets, it is key that the producer have constant
contact with their broker. He or she should have sufficient cash
flow to counter margin calls, and absorb the cost of being in a buy
position that creates a net loss.
For some, the better way to manage profitability is to hedge through
storage. This too requires having cash flow to keep the farm running
while waiting for the best time to sell.
Grain storage can give the producer the time needed to examine the
markets and sell at what is hopefully the highest possible dollar
amount, after harvest. Many is the time that this higher price will
come in the heart of winter, January, and February, and sometimes as
is the case this year, late December.
On-the-farm storage has several advantages during harvest. Trucking
costs can be reduced because the trip to the elevator is eliminated.
There is no driving time to the elevator, and no long waits in line,
eating up payroll.
There are also some drawbacks. Grain bins take up space on the farm
and cost money to build and maintain. Dryers utilize LP, and
electricity for fans and stir-ators. It takes a designated tractor
to keep auguring equipment moving. And finally, there are safety
concerns when storing crops on the farm.
Storage at the elevator is also an option. But in considering this,
there is still going to be the transportation and payroll costs, and
also charges assessed by the elevator.
The producer should assess cost of storage regardless of where the
physical crop is located. Off-site storage should be compared
against on-farm to get a fuller picture of the crop profitability.
This past fall, harvest was late for many. Those who left the corn
crop in the field until later in the season gained an advantage in
that they reduced their drying costs. Those who worried about downed
corn and an early winter brought the crop in and bore the burden of
selling wet corn, or drying before selling or storing.
Prices between October 15th and November 15th rose. The central
Illinois cash average price of corn went from $3.08 per bushel in
October to $3.53 in November. This season, prices peaked in December
with the average cash price for corn at country elevators being
$3.88 per bushel. Since that time, the price has danced a bit, but
is generally in a downward trend with the price at the end of
February being $3.67. The University Of Illinois College Of ACES
recently announced their expectation that corn prices for the 2015
season are not going to rally. The U of I is projecting corn at
$3.50 per bushel by harvest.
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So, did using on-site storage as a hedge work out for the farmer
this year? It’s debatable and contingent upon whether or not area
farmers saw the writing on the wall and sold their surplus in
December. Looking strictly at the cash price fluctuation, it appears
that many may have because as the supply hit the market in December,
prices fell.
One local elevator this year charged $0.20/bushel through the end of
the year. Corn stored there in November and December lost a total of
$0.40 per bushel, dropping the net cash value of the crop to $3.48
using the December central Illinois average. That still equates to a
40-cent gain over October cash if sold in December.
After January 1st, the charge dropped to $0.025 per month, accrued
daily. Corn held on January 31st then accrued total storage costs (Nov+Dec+Jan)
of 42.5 cents per bushel and 45 cents per bushel if held to the end
of February.
With January cash being $3.51 at the end of the month, the net after
storage would be $3.085/bushel, very close to the October cash.
On March 2nd, the central Illinois average cash on corn was $3.645.
Take from that 45 cents and the net selling price would come to
$3.195, approximately 11 cents over the October Cash.
Those who sold in December, using the Logan County yield average of
230 bushels per acre, would have gained gross revenue of $92/acre to
this year’s harvest. For several that would have been enough to
bring this year’s bumper harvest into a “break-even” position.
For those who missed that high, selling on March 1st would have
yielded an additional $25.30 per bushel.
So the bottom line, hedging through storage may be profitable this
year, but it is not going to make anyone a millionaire.
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