The cost of storing grain — commonly referred to as the cost of carry — has soared to record highs due to rising interest rates, high commodity prices and increasing costs for labor, insurance, transportation, and energy.
That’s putting a significant squeeze on grain elevators, which may be forced to lower their local bids on grain to manage through the unfavorable economics of holding commodities.
According to a new CoBank report, Rising Cost of Carry Will Force Cooperative Grain Elevators to Lower Bids, Widen Basis, the interest-related cost of carry in the 2023-24 crop year will increase 21% for corn, 42% for soybeans and 50% for all-wheat, year-over-year.
Each of those costs is estimated to be the highest on record. The projections are based on the forecasted average annual interest rate for grain merchandisers of 7.75% for the 2023-24 crop year, and USDA’s marketing year average price forecasts of $4.80/bu. for corn, $12.10/bu. for soybeans and $8.00/bu. for all-wheat.
Financing the ownership of corn, wheat and soybean inventories is a major cost of carry for grain elevators. Interest expense as a percentage of the total cost of carry can vary widely among grain merchandisers and between crop years.
According to Tanner Ehmke, lead grains and oilseeds economist for CoBank, it can typically comprise one-quarter to one-third or more of a grain elevator’s total cost of storing grain and oilseeds.
“For grain elevators, the sharp rise in interest rates couldn’t have come at a worse time as they borrow higher-priced funds on commodities that have also remained at historically high prices,” Ehmke said.
“While grain elevators are motivated to move inventory as fast as possible to lower carrying costs, processors and end users will want to delay ownership of commodities to reduce their own inventory costs.”
The persistent inverse in futures markets, where the price of later-dated contracts is lower than spot prices, further complicates matters for grain elevators.
In normal market conditions when supplies are abundant, forward futures contracts are priced higher than the nearby spot prices to account for storage costs and a small risk premium. When futures prices are lower than spot prices, farmers are motivated to sell commodities rather than hold them for future sale.
Cooperative elevators are in business to buy and market their members’ grain. That means they will be obligated to carry inventory despite the economic disincentive of doing so, according to Ehmke.
Holding commodities in high-interest rate environments also ties up a company’s working capital, which can put a strain on other business operations and is especially problematic in volatile markets when liquidity is needed for managing margin calls on futures hedges.
Source: michiganfarmnews.com
Photo Credit: gettyimages-artqu
Categories: Michigan, Business, Crops, Corn, Soybeans, Wheat