Carrying Charge Can Aid Grain Decisions

8/24/2013 7:00 AM
By Philip Gruber Staff Writer

CHRISTIANA, Pa. — A simple decision-making process can help grain farmers decide what to do with their harvest.

Extension educator John Berry presented the decision tool from the Winning the Game program Aug. 20 during the Christiana Grain Marketing Discussion Group at Dutch-Way Restaurant. Winning the Game is a grain marketing initiative developed by the University of Minnesota’s Center for Farm Financial Management.

The process calculates the carrying charge, which is the price difference between two months, usually the month of harvest and the month of sale. The charge is the interest on the value of what the farmer puts in bin storage, Berry said.

Next, the farmer should calculate a per-bushel interest cost for storage. This is found by multiplying the cash grain price times the interest rate times the number of months of storage. That number should be divided by 12, for the number of months in a year.

Dividing the carrying charge by the interest cost equals the carry, which is a percentage.

A carry of more than 140 percent is considered large. The carry the group calculated from a recent Salisbury, Md., corn market report was 279 percent. This number will change as harvest gets closer and the markets change, Berry said.

Knowing that they were working with a large carrying charge, the participants followed the steps on a flowchart that Berry provided.

If futures are low, Winning the Game recommends putting unpriced grain in storage. The group said that corn futures are relatively high right now, so they had to determine if the grain market’s basis was strong or weak.

Basis, which is an indication of demand, can be individualized based on a grower’s rapport with the elevator owner, Berry said. The quality of the farmer’s product and the ability to deliver on time can lead to a better price.

A weak basis is a way for the granary to say, “I don’t really want your crop right now,” Berry said, while a strong basis would suggest more interest from the buyer.

In either case, the process suggests selling the carry in a high futures market.

With a weak basis, the farmer should put the noncarry part of his corn in futures. If basis is strong, then the farmer should consider a forward contract.

The situation for carrying charges is different for soybeans right now, Berry said.

The carrying charge is small right now. Futures are fairly robust in soybeans, so farmers should sell their soybeans when they leave the fields. When futures are low, the product should go into storage unpriced, according to the decision process.

Berry stressed that the Minnesota model is a useful but not perfect tool.

“It was 100 percent accurate last year, and it couldn’t have been more wrong” in 2011, he said.

Roger Slusher, founder of Weaver Insurance, pointed out that the model works best if the grower already has storage available. If the farmer is deciding whether to build storage, a more applicable decision-making protocol is available, he said.

Berry concurred, saying the general rule is that corn will pay for its storage, while soy will not.

The small group tossed around numerous other topics during the informal dinner discussion, from what crops are trendy to what the prospects are for competition with Brazil, China and elsewhere.

Harvey Chase, who farms in Pennsylvania and on Maryland’s Eastern Shore, said Eastern European countries such as Ukraine and Georgia could be powerhouses some day.

“We’re not the only people in the world growing crops,” Berry said.

High grain prices are attracting farmers around the world. South America may soon be able to export grains, and the wheat crop in the central Asian nation of Kazakhstan is “excellent,” Berry said.

As the group mulled the complexities of call options and hedge contracts, Chase noted that money can be made with those instruments, but it helps to work with an industry rep one trusts.

“You’ve got to look at the money you spend on that as tuition,” Dwayne Salem, a MidAtlantic Farm Credit crop insurance sales rep, quipped.

Berry noted that grain marketing, getting a better price, accounts for one-third of the difference between the most profitable and the least profitable grain farms. Cost control makes up the other two-thirds.

The Christiana grain marketing group plans to meet monthly from November to March. For more information, call John Berry at 610-391-9840.

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