Market Matters Blog

What's a Farmer to do With a Bumper Crop?

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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A bumper crop leads to piles of grain on the ground, but regulations limit to emergency storage to three months. (DTN file photo by Nick Scalise)

Farmers have many marketing options for their new-crop harvest. Usually the first choice is to keep the crop at home if there is enough bin space, or even bag the crop rather than sell at lower harvest prices. Local elevators will offer various contract options to help them market their grain if they need to move it off farm for lack of space.

If a state-licensed elevator/plant fills up, they could apply for temporary or emergency storage allowed by U.S. Warehouse Act (USWA). This would allow the elevator to take in grain during harvest rather than turn producers away. However, temporary storage can be costly due to USDA rules/requirements and that cost may be passed on to the farmer. Temporary storage structures need to have a permanent (concrete/asphalt) base, sidewalls, tarp, and aeration fans and ducts. Temporary storage is permitted for six months while emergency storage is only allowed for three months and involves piling grain on the ground. There are many elevators that don't or can't take advantage of either option.

In that case, farmers may have fewer contract options if their local elevator/processing plant fills up and needs to wait until some of that grain ships out or is ground for feed or ethanol. Ryan Wagner who farms in Roslyn, South Dakota, told me via phone that one elevator in his area is only taking contracted grain because they are full. He said he contracted some bushels so he had somewhere to haul new-crop bushels that can't fit on his farm yet.

"There are a lot of ground piles around here," said Wagner. He has heard of elevators throughout South Dakota that have bagged new-crop wheat to make room for corn and soybeans. I have heard similar stories of farmers doing the same thing. He did tell me he has not heard of any free delayed pricing (DP) contracts offered, which makes sense if elevators are filling up and/or piling.

Tim Luken, manager Oahe Grain, Onida, South Dakota, told DTN, "In our area or here anyway on corn, I have not heard of any free DP right now, but I will not rule it out being offered after the first of the year or a little later. DP charges I have heard around here are 5 to 6 cents a month with no minimum. I have also had a few guys do HTA (hedge to arrive) on spring wheat, winter wheat and corn, but very few. I have been trying to get other producers to do this especially on winter wheat with the huge carries we see in that market.

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"As far as charges go, this marketing year on other contract options, there are no charges in my area on HTA or Basis Fixed. I have had charges in the past for HTA but with the board so low, I don't know anyone in our area charging any fees. One thing I do is (I) will not let producers roll their HTA contracts." He added, "I am surprised how many deferred payments have been applied for already this year after grain sales."

In western South Dakota, an elevator manager told me they were offering some free DP for various grains and limited bushels. Their spring wheat DP program is free until Jan 31, 2017, then costs 3 cents per month starting Feb 1, 2017. Winter wheat is 30 days free then 6 cents per month starting from the average date of unload. Corn and milo are two weeks free then 5 cents per month starting from average date of unload for a limited amount of bushels and only certain locations. This elevator, like many others, also offers basis fix, futures fix (HTA), cash and minimum price. He told me that most of his customers are using cash or DP and some of his farmers did a futures fix contact for winter wheat to take advantage of the Kansas City futures carries.

There is also a floored average contract offered that locks in a floor price. Over time the bushels are divided by the weeks specified in the contract and priced once a week. The seller gains on that week's bushels if the weekly close is over the floor price, but does not lose if below. Cost is slightly less than call options. The price of the floored average contract is deducted from the floor price and the net is paid up front, similar to a minimum price contract.

Angie Setzer, vice president of grain at Citizens Elevator in Charlotte, Michigan, told me, "Our customers use a mix of contract types. While many of my customers who have on-farm storage use HTAs to price, most of my customers who have to deliver at harvest tend to lean towards cash contracts or DP options. I do have some customers forgoing DP and choosing to spend what they would on storage, on an option after selling cash. With wide carries in the market and weaker basis values I do not recommend anyone take basis contracts at this point."

"Costs vary greatly and really are based on what the customer wants to spend to cover his needs when looking at option strategies," said Setzer. "The increase in carry in the market has resulted in increased storage costs. We've seen wheat DP increase from 8 cents a month paid last year to 12, while corn and bean DP rates have increased 2-5 cents a month versus what was charged a year ago. We are not seeing any free DP offered yet; we typically don't at harvest time."

Setzer said, "We have places that have permanent structures set up for piles and those will be used. In the eastern belt it is rare to see a pile like you'll see out this way though. I was amazed last year when I saw corn dumped in the parking lot of co-ops for November movement. You just don't see that happen in my neck of the woods!"

So, the choices are many, but some of them are not very lucrative for farmers, especially basis fix contracts and cash contracts. The DTN Cash Index for corn on October 21 was $3.10 and while farmers would be happy to see $6, realistically they would likely take $3.50 or better at this point. The DTN Cash Index for soybeans was $9.12 and while farmers love "beans in the teens," they would probably be happy with a price of $10 or higher.

However, right now at harvest the key is to find a home for their crops and like one farmer told me, at least make a contract so you can get rid of it if you don't have space on farm.

Mary Kennedy can be reached at mary.kennedy@dtn.com

Follow her on Twitter @MaryCKenn

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