What is in this article?:
- Economics of corn, soybean storage
- Small return
The decision by producers to store corn and soybeans should be based on expected returns rather than on capacity to store.
With smaller grain and oilseed supplies than those of a year ago and increased storage capacity, there should be fewer crop storage issues than in recent years, said University of Illinois economist Darrel Good.
"The decision by producers to store corn and soybeans, however, should be based on expected returns rather than on capacity to store," he said.
Total supplies (production plus beginning stocks) of the summer- and fall-harvested crops of wheat, feed grains, and soybeans is currently estimated or forecast by the USDA to be 937 million bushels, 4.3 percent smaller than supplies of a year ago.
"The USDA estimates on-farm and off-farm grain storage capacity as of Dec. 1 each year. Total storage capacity on Dec. 1, 2010, was estimated at 22.255 billion bushels, 505 million bushels larger than capacity on December 2009," he said.
Although storage capacity is not completely fungible over space or by type of crop, there should be ample capacity to store in 2011.
The storage decision of individual producers is based on available storage capacity and on the expected returns from storage.
"Returns to storage can be captured in two ways. One way is to sell the crop for later delivery at a price that exceeds the spot cash price by more than the cost of owning and storing the crop. This can be accomplished through a forward cash contract or by selling deferred futures contracts," he said.
Good said that using a forward cash contract eliminates all uncertainty about the return to storage. Selling futures to price a stored crop introduces uncertainty about future basis levels and the actual returns to storage.
"The second way to capture a return to storage is to store the crop unpriced in anticipation of higher cash prices.
Forward contracting or hedging a stored crop would be done only if a positive return can be captured. Forward pricing eliminates downside price risk but also eliminates a return from higher price levels. Storing a crop unpriced allows the producer to capture higher prices but provides no protection from lower prices.