On-farm storage may become more important

Grain markets will increasingly be paying North American farmers to store their grain because it is not required as urgently as it has been in the past.
 | File photo

Markets expected to pay North American farmers to store their grain because it is not required as urgently as it once was

SAN ANTONIO, Texas — Farmers will have more opportunity to get rewarded for storing their grain in the coming years, says a senior official with the CME Group.

The United States used to be the primary provider of grains and oilseeds to customers around the world.

That is no longer the case, said Fred Seamon, executive director of commodity research and product development with the CME.

The U.S. has become the residual supplier, taking a back seat in certain key markets to Brazil, Russia and other exporters.

“What that can mean for us is more storage markets and that is an opportunity for farmers who have on-farm storage,” he told growers attending the 2020 Commodity Classic conference.

Grain markets will increasingly be paying North American farmers to store their grain because it is not required as urgently as it has been in the past.

“If we’re the residual supplier, we could expect to see more times in the future where the market is in that position where the price in the future is greater than the price today,” said Seamon.

He provided an example of a corn farmer who finishes harvest on Oct. 20. The December futures is US$4.05 per bushel and the basis is 30 cents under, resulting in a harvest cash price of $3.75.

The May futures contract is $4.20 per bu. and the expected May basis is 10 cents under based on history. That means the expected May cash price is $4.10.

So the expected gross storage return to the farmer is 35 cents per bu. As long as the farmer’s actual storage costs are below that amount, he is making money by using the futures market to capture the carry in the market.

Fellow panelist Jason Henderson, associate dean of Purdue Extension, told growers the worst is behind them but they will be in belt-tightening mode for years.

Grain markets move in cycles where there is a boom, followed by a bust, followed by a plateau. He believes the bust period is over.

“I think we’re in the plateau,” he said.

Henderson believes the U.S. is entering a period of agriculture that is reminiscent of the 1990s.

That is a decade where corn prices were essentially flat, around $2 per bu. plus or minus a dime.

Profit margins in agriculture were down despite a booming U.S. economy.

The decade finished with the Asian financial crisis that sliced exports and led to $20 billion in ad hoc subsidies.

Sound familiar?

The previous plateau before that was following the Second World War boom and bust period. That plateau lasted through the late-1950s, all of the 1960s and the early 1970s.

Henderson said agricultural exports will grow during a plateau but at a low rate, in the range of two to three percent per year.

Government payments to farmers tend to soar during plateau periods. They accounted for as much as 25 percent of farm income in the early 1970s and 45 percent in 2003.

Subsidies are once again on the rise, approaching 20 percent in 2019. He expects them to drop back down after the U.S. presidential election in 2020.

Operating loan extensions and renewals start to climb and repayments start to fall during plateaus and that is happening today.

Michael Langemeier, agricultural economist at Purdue University, said there has been an erosion of working capital on U.S. farms but low interest rates and strong land values have shielded farmers from the economic woes.

He tracks the number of farms in financial stress, which is defined as operations with a debt-to-asset ratio of over 70 percent and negative profit margins.

Langemeier estimates that five percent of U.S. farms are in financial stress. That is a lot higher than it was in 2015 but still low by historical standards. For instance, it peaked at 12 percent during the 1980s farm crisis and was about nine percent in the early 2000s.

“One of the things that is really keeping the financial stress down is the very good solvency related to these strong land values,” he said.

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