Grain delivery woes, futures prices align to make storage pay

It isn’t fun for farmers to sit atop a mountain of crops they can’t move.

However, farmers who are forced to hold onto grain into summer and next fall are being paid by the market to do so.

Marketing advisers say good carry in some futures markets and the possibility of basis improvement mean farmers are being compensated for this winter’s grain movement problems.

“It kind of takes the sting out of it,” said John De Pape, whose Farmers Advanced Risk Management Co. specializes in exploiting carrying premiums.

“If you have to carry (canola) into new crop, which some guys are going to have to, you (could) make $60 to $70 per tonne,” he said.

Farmers might have forgotten about the concept of storage premiums in recent years because many crop markets were inverted.

In a textbook crop market, prices climb each month into the future because that represents the cost to either the farmer or grain buyer of holding onto the grain.

In an ideal situation, the sooner a farmer wants to sell his crop to a buyer, the lower the price will be, and the longer he holds onto it, the higher the price will be.

A number of events have caused that situation to reverse in recent years, and last year was particularly extreme. Farmers who held onto crops paid heavily each month for not moving them.

However, each month of forward futures months has been higher for most crops this year, allowing farmers to benefit from keeping grain on the farm and moving it later.

Many farmers have had no choice in the matter.

Grain transportation has hit such a bottleneck that farmers who hadn’t already made delivery arrangements now have no choice but to hang onto their crops to sell in the summer or next fall.

Jon Driedger of FarmLink Marketing said farmers are upset they can’t clear crop to keep cash flowing in, but the positive carry is allowing them to feel less aggrieved while they wait.

“Last year the markets were in an inverse, so much of the time you didn’t get paid for storing. But this year it’s different. Why not let the market pay you to store it?” he said.

“What’s your cost of storage? Just interest. There’s no opportunity cost.”

Errol Anderson of Pro Market Communications said positive carry in futures prices allows farmers to also push off today’s extremely poor basis levels.

“The only thing you can do now is wait for basis appreciation,” he said.

“The carry is out there. Sell the carry if you can wait for your paycheque.”

De Pape said farmers are in such a pickle now that they have to take any offers they can get. However, they can lock in the carry on futures-based prices for the crops they know they’re going to be holding onto for the next few months and match their hedges to their marketing without too much danger.

With positive carry, farmers can use futures to hedge forward crop prices and roll the futures hedge as long as they’re holding onto the crop.

That wouldn’t have worked in an inverted market, but it now allows farmers to continue collecting carrying charges for as long as they hold onto crop.

“There’s good carry out there, so why not grab that? Figure out the basis later. I don’t see the basis getting any worse,” said de Pape.

“You just keep rolling till the basis behaves.”

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