Prior to the infamous 1998 “alflatoxin” season, the case for on farm storage of corn was harder to make. We would generally see a premium basis in the Mid South as our harvest began, and our corn was needed to fill in for depleted supplies and prime the export pipeline. Why store a crop when you could get 15 to 20 cents over at harvest?
But then 1998 came along, and millions of bushels were contaminated with aflatoxin. Grain merchandisers point to that horrible season as the beginning of the end of our big pre-harvest premiums. From the ’99 season on, our corn basis bids on the river started at 15 to 20 cents under the September Chicago futures and just got worse from there. Some say that “southern origin” corn sells at a discount to Midwest corn at the Gulf because the elevators don’t want to get caught with a crop they cannot sell for export. They also worry that the southern corn goes out of condition in transport quicker than Midwest corn.
The result of 1998 was that southern corn lost much of its market value at harvest. But an interesting thing happens after harvest. The local market becomes very interested in the balance of our southern crop that is in storage on farm. That is because the states of Arkansas, Mississippi and Louisiana are all corn-deficit areas — last year 320 million bushels more corn were consumed than were produced. The growth in poultry and catfish production (and perhaps ethanol down the road) creates a ready market for farm-stored corn.
Most seasons we see an improvement of 20 to 30 cents over the harvest basis. It was also reported that those farmers who were able to store their 1998 crop on farm did much better when it came time to deliver that crop. The benefits of having the ability to dry and store a major portion of your corn crop are certainly worth considering.
Let’s say you plant 1,000 acres of corn in Northeast Louisiana. What would it cost to be able to store the whole 150,000-bushel crop on farm? For a “Cadillac” closed loop system that included a wet tank and a continuous flow 800-bushel-per-hour drier, you’d probably be looking at around $250,000 to $300,000 installed (or $1.65 to $2.00 per bushel). That’s comparable to a new cotton picker or a loaded up combine. As you increase the size of the system, the per bushel costs come down some.
The Farm Service Agency currently has a 3.25 percent interest rate for their Farm Storage Facility Loan Program. It has a limit of $100,000 per person (or entity) and 85 percent of the principal amount. A real estate lien is required on notes over $50,000 and only new permanently affixed grain handling and drying equipment will qualify. Portable augers or driers and any type of scales don’t qualify under the FSA’s program.
At a 3.25 percent interest rate over a seven-year term, the annual payment on a $300,000 note would be around $47,000 a year. That means that over the course of seven years, if you could generate a 30-cent-per-bushel improvement in the price you received, you would cover the note. At the end of seven years, you would own an asset that pays you a seasonal return with an expected life of at least another 15 to 20 years.
Could you generally expect to pick up 20 to 30 cents in basis each season? If past seasons are any indication, the answer is yes. Last season the NE Louisiana corn basis improved 35 cents for corn stored on farm past the first of the year and sold to the feed mills versus selling on the river at harvest. The previous season, we saw about a 27-cent improvement. Most grain merchandisers expect that the after harvest basis for corn will continue to be strong.
Another element to consider is what the trade calls carry, which in this case is the difference between the September futures price and the March futures. Generally, what they call “full carry” will be around 22 cents. That means if you price off the March contract instead of using the September contract you should be able to capture another 14 to 20 cents most seasons. That would come in addition to your basis improvement.
Storing any crop on farm does have its disadvantages when compared to hauling it to the river and pricing it across the scales. You take the responsibility for seeing that the crop stays in good condition rather than the elevator manager. You also have to pay the bills for electricity, natural gas or propane and repairs.
Since feed buyers do not offer a “hedge to arrive” contract, if you want to lock in a good futures price which often shows up very early in the marketing season, you will have to carry the hedge yourself. If cash flow is an issue you may want to get your lender involved.
There are also reports of several million bushels of new storage, both commercial and on-farm, expected to come on line this season in the South Delta. This added storage capacity may negatively impact the after-harvest basis in seasons to come.
We have already mentioned the financial advantages of storing corn on farm. There are other benefits: reduced transportation costs if you sell out of the bins, less risk of aflatoxin vs. drying down in the field, keeping the combines running rather than waiting for trucks to come back from the river, and control—you sell your corn to whomever has the best bid, not one or two elevators.
Bottom line...Past markets tell us you should be able to pick up another 20 to 30 cents most seasons storing your corn on farm. This is definitely an option Southern corn producers should consider.
While on-farm storage does put some important cards in your hand, it is not a cure for poor marketing. You still need to understand and use all the marketing tools available to really make those bins work for you.
D. Trent Roberts is an agricultural marketing consultant with Scott & Associates in Little Rock, Ark. He can be reached at 800-206-2474 or e-mail: [email protected].