Kub's Den

Spilling Your Gut Slot

Elaine Kub
By  Elaine Kub , Contributing Analyst
Nationwide, applications for emergency and temporary grain storage licenses have increased every year since 2012. (Courtesy graphic)

Spill your guts. Admit it -- you secretly like looking at corn piles better than bins. Just the way they look, bright yellow and shining in the sun, instead of hidden away and anonymous behind a curved steel shield.

Well, you're not alone. The entire industry has learned to love piling grain out under the unlimited volume of the blue sky. Altogether, the harvested volume of corn, soybeans, and wheat in 2016 is expected to be 21.6 billion bushels, 10% higher than last year. It all needs someplace to go, right? At least 10% more space than last year? Well, the industry has reached such a level of comfort with piles and bunkers that the Warehouse License and Examination Division of the Farm Service Agency has granted licenses for as much as 28% more emergency and temporary grain storage this year than last.

Don't feel too bad for our friends in the grain bin business. The outdoor storage strategies will only hold about 4% of the three main crops' total 2016 volume -- 187 million bushels' worth in licensed emergency piles and 763 million bushels' worth in temporary bunkers or bags (licenses approved as of Sept. 23). The rest of the large year-over-year increase will go into traditional concrete or steel bins, which are better-suited to long-term storage or for aerating damp grain, especially in regions that can't count on nice cold winter weather.

There was once a time, in the not-so-distant past, when the sight of corn being spilled out into a pile on the ground during the gut slot of harvest caused an instant bearish dread, like, "Oh, no. There is way too much grain in the world. Nobody wants to buy it. I guess there's nothing better to do with it than just throw it away out behind the elevator. Ugh."

Alternatively, an analyst can try to put a bullish spin on it, estimating that 1% to 5% of any grain that gets dumped in an uncovered pile may be lost or damaged, but that argument's a bit of a non-starter. The crust of damaged grain can be blended away, and if the grain starts dry under a nice tight cover, the damage or losses may be very minimal. Nationwide, the use of covered temporary storage solutions -- now 50% more volume than was licensed in 2013 -- has been growing relatively faster than the use of open piles.

This is all less of a supply-and-demand story than a fascinating logistics subtlety. If an elevator has a nearly-infinite expandable storage plan, then that's an elevator that won't have to scramble as hard at harvest to make space in its traditional bins, and therefore an elevator that may have less desperation to sell into the cash market, and therefore an elevator that won't have to pay outrageous freight prices for quick shipping solutions. The industry's willingness to use piles and bunkers may be keeping some pressure off of basis bids.

Sure enough, corn basis levels at origins with access to the barge market are currently sitting around 20 or 30 cents under the December futures contract. Farm Service Agency data is broken down state-by-state, so I can't definitively say how many piles and bunkers are going up at all the nation's barge-loading locations, but looking just at a few typical river-adjacent states,* 188 million bushels worth of this outdoor storage has been licensed in 2016. Twenty-nine million bushels of that is in open piles -- a 79-fold increase from last year at this time, when there were just a few small piles in Arkansas and Tennessee.

If this trend is serving as a relief valve for cash market selling pressure, then that may be helping those basis values. But most of the basis strength should be attributed to the favorable barge freight rates, which are running 26% lower than last year at this time, or 34% below the three-year average. USDA's Agricultural Marketing Service data shows the cost to ship grain from the Lower Illinois River to the Gulf of Mexico dropped again this week, to $20.32 per ton (60 cents per bushel of soybeans).

Meanwhile, farther west, corn buyers near ethanol plants and rail loaders are at a seasonally normal 40 to 50 cents under futures. Even the eastern Dakotas aren't much worse than 60 to 70 cents under futures. Again, it probably helps that elevators feel able to store excess supplies of grain in piles and bunkers rather than scrambling to find trains and turn away farmers' bushels. Analysis this month by Peter Caffarelli at USDA's Agricultural Marketing Service shows state-by-state shortages in on-farm and off-farm storage capacity compared to existing grain stocks and fall production, but when I compared those shortages to the currently licensed volume of temporary bunkers and emergency piles, I found the outdoor storage will pick up a lot of the slack in most states except some places like Kansas (still short by about 280 mb despite 102 mb worth of licensed outdoor storage) and Nebraska (still short by 154 mb despite 116 mb worth of licensed outdoor storage). The secondary market for shuttle freight has risen over the past week, pegged by AMS at $1,200 above tariff, or $853 higher than last year at this time. But it doesn't take too much imagination (or traumatic memory from 2013 and 2014), to ponder how much worse that scenario could be.

Geographically, the usage of piles and bunkers is surprisingly widespread across 33 states over the past four years. In 2016, the state with the most licensed capacity for emergency and temporary grain storage is Iowa, with 152 million bushels, which makes sense considering it's the state with the most volume to handle. But the number two state is South Dakota, with a relatively huge 140 million bushels of space licensed, or 13% of its total expected corn, soybean, and wheat volume. South Dakota is followed by Nebraska, Kansas, and Minnesota, which demonstrates a couple of things. First of all, what we consider the "Corn Belt" has expanded westward and northward in the years since corn yields have become more economically favorable than small grains production in the Great Plains. Apparently as the region's farmers have trended away from wheat and toward higher volumes of corn production, the region's bin building didn't keep up, and now the yearly plan to use bunkers and piles is intentional.

Secondly, it looks like confidence in nice cold winters, with less threat of grain getting wet and hot, probably leads to greater confidence in using corn piles. If an elevator -- or a farmer -- can make the strategy work and keep the grain in condition, then why not? Carry spreads in the corn futures market are offering 24 cents to hold the grain until next July, which is 57% of the full cost of commercial carry. But that "full cost of commercial carry" number is a calculation that includes all the depreciation and upkeep costs of big concrete bins. The alternative strategy of storing grain in a bright yellow pile under a big blue sky would have different costs, and increasingly realized benefits.

* Arkansas, Illinois, Indiana, Kentucky, Louisiana, Missouri, Mississippi, Ohio, Tennessee

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.


Elaine Kub