CattleNetwork.com, KS
09-08-06
Grain Storage Space Key Component Of US Fall Harvest
CENTRAL CITY, Neb. (Dow Jones)--Scarce storage space is poised to produce a major impact on the U.S. cash grain market, with bin-space availability this fall determining immediate marketing patterns, long-term price-trends, and even what kind of crop producers may potentially raise next season.
"The entire 2006 corn and soybean crop should be placed into storage if at all possible," said Ag Management Services market consultant Rich Balvanz in a recent customer advisory. "The carries (price-premiums for deferred delivery) that exist in the corn market are simply too large to ignore. There has never been a year in recent history, when the farmer has been paid so much for storing a crop."
Many other experts are touting a similar "store it all" strategy, advising farmers to simply wait, rather than accept cash prices which have dropped by 20 cents a bushel for corn - and 65 cents for soybeans - during just the past three to four weeks.
The slump - occurring in concert with bountiful August rains and a decided improvement in new-crop prospects - has left deferred futures trading at a significant premium to cash contracts at the Chicago Board of Trade, virtually eliminating the incentive for farmers to sell on the cash market.
As of the close of business Thursday, the spread between December 2006 and July 2007 CBOT corn futures stood at 46 1/4 cents per bushel. For soybeans the spread between November 2006 and July 2007 futures equaled 56 1/4 cents.
"These are unusually large incentives to hedge and store grain into next spring or early summer," said Iowa State University agricultural economist Robert Wisner. "After harvest, strong domestic demand for corn for ethanol processing and domestic feeding - along with stable exports - are expected to bring a larger than normal increase in corn prices into spring and summer 2007."
Cash market premiums of 20-30 cents are already being offered in some markets for corn carried for as little as 90 days, from October to January.
But Can Farmers Make It Pay?
Capturing that carry might be tricky, however, considering 2.6 billion bushels of corn and soybeans are still lying in the bin, left over from the 2005 crop.
"There is a storage shortage that is just going to get worse," warned market analyst John Roach.
According to U.S. Department of Agriculture estimates made just last month, total corn, soybean and grain sorghum supplies this fall will equal 16.85 billion bushels, which will only add to the 2.5 billion bushel pile of wheat, oats, barley, rice and oilseeds that were harvested by U.S. farmers this summer.
Earlier this year, USDA estimated total U.S. grain storage capacity at just 19.93 billion bushels, with 57% of those bins located on individual farms.
"If there is not enough storage, you can bet on cheap prices at harvest, expensive commercial storage rates, and strong price appreciation after harvest," said Roach. "The next job of the market is to figure out who will store the crop, and where are they going to put it."
It's very likely that farmers and country elevators in some states will have little choice but to build temporary storage, immediately sell or ship their fall crop, or simply dump it in mammoth piles while waiting to do so.
A statistical breakdown of the situation undertaken by commercial firm FCStone in August indicates that corn and soybean stocks alone will outstrip available storage capacity by 26.3% in Indiana, 22.5% in Illinois, 17.3% in Wisconsin, 13.2% in Iowa, 5.4% in Ohio, 3.5% in Minnesota and 2.9% in Nebraska.
Basis Could Fall This Autumn
With storage needs overtopping storage capacity in those seven states by some 1.3 billion bushels, Wisner said basis for corn and soybeans is likely to suffer this fall, as some sectors of the grain trade prepare to simply store grain "under the sky" this fall. Basis is calculated by subtracting the local supply and demand discounts from futures prices to calculate cash prices.
"Outside grain storage can involve substantial risk of quality deterioration," he said. "This risk tends to get built into the basis when crops are large."
He added basis - especially for corn - appears likely to improve significantly by next spring or summer, though, especially in areas near river terminals, ethanol plants or large livestock operations.
That rebound expected in eventual market prices for 2006-crop corn may even impact 2007 production, potentially convincing some farmers to skew spring plantings toward corn and away from soybeans.
"Current 2007 price projections are in the $2.70- to $2.80-per-bushel range for corn," said University of Illinois farm financial management specialist Gary Schnitkey. "Hence, some farmers may find switching to more corn profitable."
A study on the economics of the issue conducted by Schnitkey and University of Illinois extension marketing specialist Darrel Good show that corn prices at that level would make the crop more profitable for some farmers than $6 soybeans that yield 45 bushels an acre.
"Recent and planned construction of ethanol plants suggests the need for substantially more corn to meet the needs of those plants, livestock producers, other manufacturers, and foreign buyers," said Schnitkey. "As a result, the profitability of corn must exceed that of soybeans to entice farmers to plant more corn."
Longer-term, USDA Chief Economist Keith Collins told a congressional committee this week it is entirely possible corn prices "could set new record highs over the next five to six years," as the ethanol industry seeks to tempt farmers into growing the additional corn which will be needed to supply their plants by 2010.
"Econometric relationships suggest that corn prices would have to rise to around $3.10-3.20 per bushel, or near the current record high, to attract the 5.5 million more acres to corn," he said.
Source: Gary Wulf, Dow Jones Newswires;