Grain storage as a marketing strategy

Introduction

Storing crops on the farm is used as a marketing strategy to give producers the ability to seek greater profits. Harvested crops must either be stored or sold to a buyer who is accepting immediate delivery. Even if a buyer is accepting delivery, it may not be practical to deliver the crop during harvest and thus it must be stored. On-farm storage is costly and requires careful consideration as part of crop marketing.

Crop storage gives producers the opportunity to wait and see if prices will change. Producers store with the hope that prices will rise post-harvest, but there is also the chance that prices may fall and crop storage would result in a loss. Even in the case that prices remain the same, producers can incur a loss from storing because of foregone interest received or interest paid, known as opportunity cost. Storage costs should be considered when making the decision to store crops.

How it works

Commercial handling systems in western Canada do not have the capacity to store the entire crop at harvest. The market will often pay producers a price premium for deferred delivery, compensating for at least part of interest and other costs of storing crop on the farm. Prices are generally at their lowest during the harvest period. Therefore, it is usually wise to store at least some of your crop.

Committing to sales periodically throughout the marketing period is a way of averaging price risk. A marketing period could be from the point of choosing a crop to seed to the time that crop production is all sold. If a producer sells their entire product in one sale, they would only be able to capture the price at that moment in time.

If a producer periodically prices crop throughout the marketing period, their crop is exposed to a larger range of prices. Storing a crop gives producers the ability to extend the pricing period, diversifying their price risk.

There are 3 financial considerations of storing crops:

1. cost of buying or building and maintaining on-farm storage
2. opportunity cost of receiving sales proceeds from the crop earlier and using the money to pay debt or invest
3. ability to capture deferred delivery price premiums

Table 1 below is an example showing the cost of farm storage. The longer that crop is held on farm, the greater the accumulated storage costs. The storage cost was calculated using the purchase price of a new bin. The storage cost will differ on individual farms based on the type and size of bin or other storage method, applicable interest rate and depreciative method.

For someone with no debt, there would be a different storage cost, but it would not be zero because money has an investment value. If applicable, the costs of an aeration system and maintenance should be included. Additional handling costs compared to selling directly off the combine could also be considered.

Table 1. Example yellow pea prices in Canadian dollars per tonne from harvest forward.

Table 1 shows:

• the opportunity cost increases as time progresses, because this is foregone investment income OR foregone debt repayment opportunity
• storage costs accumulate as the crop is stored – the longer the product is stored, the greater the cost incurred on each unit of commodity, while recognizing that an empty bin also has investment and depreciation costs
• the net return is the price realized after opportunity and storage costs are removed from the cash price

Conclusions from this example are:

• storing and selling in November would have yielded the highest return
• storing and selling later may result in a higher product price, but when the opportunity and storage costs are considered, the net return may not be greater than selling earlier.

How opportunity costs can vary

The cost of storing crop varies with each producer's financial situation. Examples are a producer:

• who is debt free and whose opportunity cost is a bank term deposit.
• with an operating loan at Prime + 1% interest.
• with credit card or trade debt at 2% interest per month – this will greatly affect the foregone interest on the sale of crop as revenues from the sale could have been used to be used to pay that high interest rate debt.

Advantages and limitations

Advantages of farm storage:

• avoids selling grain when prices are often seasonally low, that is at harvest
• helps manage income for tax purposes
• allows for more control over harvest operations
• allows for intermittent cash flow
• allows for staggered sales, thereby diversifying price risk

Limitations of farm storage:

• extra handling of grain is required
• increased risk of crop spoilage or theft
• added cost to farm storage whether facilities are in use or not
• difficult weather, such as excessive snow, rain or cold, may interfere with delivery plans
• extended financing of inventory may require co-operation and understanding of your lender

Summary

Storing crop gives producers an opportunity to wait and see how market prices will change. A producer's marketing strategy is based on their need for cash and their propensity to take on risk.

It is often not practical for a producer to deliver crop at harvest. However, when storing crop, both opportunity and storage costs need to be considered.

The marginal benefit of storing the crop must be greater than the marginal cost, to be a profitable decision.

Farm storage is a marketing tool. If managed correctly, it can increase a producer's net return. However, storing crop costs money and that must be considered when making the decision to store or not to store.