<b>Farmers Adopt a Country Elevator Mindset</b>
OMAHA (DTN) -- Mark Ruff started building grain storage in 1997, his first year farming. He added a little storage capacity each year before his first big investment in a 48-foot-wide, 53,000-bushel bin with an airflow system and continuous-flow dryer in 2003-04.
He nearly doubled his capacity in 2010. He upgraded again in 2012, but this time he more than doubled his on-farm storage to 250,000 bushels.
"It really goes back to return on investment," the first-generation Circleville, Ohio, farmer said. "I haven't found another piece of equipment that has a greater return than grain storage."
Farmers have added more than 2 billion bushels of on-farm storage capacity over the last decade, spurred on by demand from new ethanol plants, government financing programs and tax incentives. Increased production, harvest efficiencies and the opportunity to capitalize on seasonal basis patterns gave farmers plenty of reasons to reinvest their profits during the "gravy years."
Even though commercial storage has also expanded by about 2 billion bushels in the last decade, the ethanol boom and rise of just-in-time grain origination have shifted power over prices to the farmers' corner.
"I think it's changing the dynamics of the whole agriculture industry. You've removed control from the ABCs and replaced it with farmer storage all over the nation," Colon, Mich., farmer Barry Mumby said, referring to the country's three largest grain companies, Archer Daniels Midland, Bunge and Cargill.
Farmers are happy to be the just-in-time supplier, he said, especially since there's no pressing reason for them to sell. After several very profitable years, farmers' balance sheets are strong and they're flush with cash.
"If you pay the right price, I'll deliver you corn tomorrow. As long as farmers have good-quality corn and good-quality storage, I think they hold the cards."
<b>TAKING BACK THE BASIS</b>
Brett Mohn farms 30 miles south of Minneapolis and sells corn into the Mississippi River market. The basis -- the difference between cash and futures market prices -- is at least 20 cents better on average when the river's spring shipping season starts.
"If you can hold grain until the May timeframe, you're generally going to get a good basis return," Mohn said. "Storage is going to pay for itself over time. Any time you maintain your possession of the grain, it opens the door for flexibility in marketing."
If farmers sell grain at harvest instead of selling in March, May or August, they lose the opportunity to take advantage of the carry in the market, Ruff said. The market is considered to be in a carry situation when deferred contracts are priced higher than the nearby contract. It indicates a market that is offering an incentive to hold grain for future use.
A new ethanol plant opened 10 miles away from Ruff's farm several years ago, and it created a new, year-round marketing opportunity in his backyard. There's a "huge basis improvement if you're willing to haul it in July and August," he said.
Often, the ethanol plant will have a strong positive basis that no one in the neighborhood can match, not even the same brand of elevator 10 miles the other direction. Sometimes, the ethanol plant will even pick up the grain.
"It always varies (from year to year), but I figure if we're not making 25 cents a bushel from the storage of grain, we haven't done a good job of marketing," Ruff said. "At the end of the day, we always hope to be able to capture more and more of that basis improvement."
Ruff sees storage playing a large role in future farm profitability. Over the past several years, historically high prices meant farmers made decent profits selling grain right off the combine. USDA's long-range forecasts show weaker crop prices as global production and stockpiles grow in the years ahead.
"My guess is we're going to start re-entering a period where grain storage is going to start paying more than in the past few years," Ruff said.
<b>THE GREAT INTANGIBLE: EFFICIENCY</b>
It's much more difficult for Ruff to put a dollars-and-cents figure on the logistical efficiency of his storage system.
He can harvest all day long and keep the dryer constantly running. Grain storage doesn't just save him time by avoiding long lines at elevators during harvest: Instead of owning three or four semi-trucks that sit idle most of the growing season, he only needs two.
"It makes each hour that much more valuable," he said. "We see a great amount of production efficiency when it comes to harvest speed, number of hours in the field, lack of down time. That's really a huge payoff when it comes to a reason to have storage."
The Peterson family, of Loretto, Ky., had another reason to expand their storage -- quality.
The Petersons supply non-GMO corn for what they call the "original ethanol," the fast-growing whiskey market.
They've doubled their farm's storage capacity and invested in energy-efficient grain systems over the last five years. When they built two new grain dryers in 2013, they improved their energy efficiency 66%.
"With buyers that demand 14% moisture, high test weight, very good appearance, no odors and seven-day-a-week deliveries, state-of-the-art storage was the ticket to premium prices," said Bill Peterson, the senior partner in a three-brother and one nephew business operation. "We have a very strong local market, but you don't get in unless you have the quality."
Ruff thinks managing the stored crop's condition is worth the risk. "When it comes down to it, that opportunity makes more than what it costs you, or what your risk was, by using the basis to your advantage."
<b>A MATTER OF NECESSITY</b>
Ethan Markestad planted 400 acres of corn in 2008, a first for his farm in Maddock, N.D. He had about 70,000 bushels of storage, enough for the average 60 bushels per acre wheat crop and 35 bpa soybean crop.
"When you add corn into the mix, it doubles your bushels," Markestad said, noting that he now splits his crop mix fairly evenly between corn, soybeans and wheat. He more than doubled his farm's storage capacity to 180,000 bushels.
North Dakota's corn acres have increased 140% since 2002, despite USDA seeing acreage fall shy of 3 million this year. North Dakota also has 2.7 bushels of on-farm storage for every bushel of commercial storage, the highest in the major corn-growing states. The mismatch often gives farmers more leverage in the basis markets.
This year has been an exception to storage as a springtime moneymaker in North Dakota. Spring basis has widened because of the logistics logjam, Markestad said. But farmers are patient and plan to wait for better prices before opening the bin doors.
<b>FARMERS ADOPT A COUNTRY ELEVATOR MINDSET</b>
Farmers are utilizing their new bin space to play the role of a "mini-commercial," said Mike Hogan, a market adviser at Stewart-Peterson.
"A light bulb clicked on somewhere along the way and farmers realized they could capture the carry and pay themselves storage. Farmers are taking on that country elevator mindset," he said.
Hogan sees the industry moving toward a just-in-time pricing model where end users push the basis higher when they need to source grain. While that's already common in the ethanol market, "I think it's going to go more that route with elevators developing more of a spot business than a contract business."
Mumby agrees, and said he often wonders if grain originators understand the magnitude of storage shift. In his regular conversations with grain traders, originators first said they thought farmers were holding off on corn sales until the first of the year for tax purposes. Some corn came to market, but not the flood traders expected.
Then the thought was farmers would have to sell grain to pay property taxes and cash rents in late February and early March. Once again, no sales flood.
Now they think farmers will start selling once the new crop is in the ground, Mumby said.
"It seems like it's a constant series of almost wishful thinking on the originators' part that they're going to get the flow of corn to improve rapidly at some point in time," he said. For the past year or so, the major grain companies have cited slow farmer sales as a reason for poor results in their grain trading divisions.
"And it seems like the whole thing has changed from the 'farmer's got to sell it' to 'what do we do to make him sell it?'"
OMAHA (DTN) -- Mark Ruff started building grain storage in 1997, his first year farming. He added a little storage capacity each year before his first big investment in a 48-foot-wide, 53,000-bushel bin with an airflow system and continuous-flow dryer in 2003-04.
He nearly doubled his capacity in 2010. He upgraded again in 2012, but this time he more than doubled his on-farm storage to 250,000 bushels.
"It really goes back to return on investment," the first-generation Circleville, Ohio, farmer said. "I haven't found another piece of equipment that has a greater return than grain storage."
Farmers have added more than 2 billion bushels of on-farm storage capacity over the last decade, spurred on by demand from new ethanol plants, government financing programs and tax incentives. Increased production, harvest efficiencies and the opportunity to capitalize on seasonal basis patterns gave farmers plenty of reasons to reinvest their profits during the "gravy years."
Even though commercial storage has also expanded by about 2 billion bushels in the last decade, the ethanol boom and rise of just-in-time grain origination have shifted power over prices to the farmers' corner.
"I think it's changing the dynamics of the whole agriculture industry. You've removed control from the ABCs and replaced it with farmer storage all over the nation," Colon, Mich., farmer Barry Mumby said, referring to the country's three largest grain companies, Archer Daniels Midland, Bunge and Cargill.
Farmers are happy to be the just-in-time supplier, he said, especially since there's no pressing reason for them to sell. After several very profitable years, farmers' balance sheets are strong and they're flush with cash.
"If you pay the right price, I'll deliver you corn tomorrow. As long as farmers have good-quality corn and good-quality storage, I think they hold the cards."
<b>TAKING BACK THE BASIS</b>
Brett Mohn farms 30 miles south of Minneapolis and sells corn into the Mississippi River market. The basis -- the difference between cash and futures market prices -- is at least 20 cents better on average when the river's spring shipping season starts.
"If you can hold grain until the May timeframe, you're generally going to get a good basis return," Mohn said. "Storage is going to pay for itself over time. Any time you maintain your possession of the grain, it opens the door for flexibility in marketing."
If farmers sell grain at harvest instead of selling in March, May or August, they lose the opportunity to take advantage of the carry in the market, Ruff said. The market is considered to be in a carry situation when deferred contracts are priced higher than the nearby contract. It indicates a market that is offering an incentive to hold grain for future use.
A new ethanol plant opened 10 miles away from Ruff's farm several years ago, and it created a new, year-round marketing opportunity in his backyard. There's a "huge basis improvement if you're willing to haul it in July and August," he said.
Often, the ethanol plant will have a strong positive basis that no one in the neighborhood can match, not even the same brand of elevator 10 miles the other direction. Sometimes, the ethanol plant will even pick up the grain.
"It always varies (from year to year), but I figure if we're not making 25 cents a bushel from the storage of grain, we haven't done a good job of marketing," Ruff said. "At the end of the day, we always hope to be able to capture more and more of that basis improvement."
Ruff sees storage playing a large role in future farm profitability. Over the past several years, historically high prices meant farmers made decent profits selling grain right off the combine. USDA's long-range forecasts show weaker crop prices as global production and stockpiles grow in the years ahead.
"My guess is we're going to start re-entering a period where grain storage is going to start paying more than in the past few years," Ruff said.
<b>THE GREAT INTANGIBLE: EFFICIENCY</b>
It's much more difficult for Ruff to put a dollars-and-cents figure on the logistical efficiency of his storage system.
He can harvest all day long and keep the dryer constantly running. Grain storage doesn't just save him time by avoiding long lines at elevators during harvest: Instead of owning three or four semi-trucks that sit idle most of the growing season, he only needs two.
"It makes each hour that much more valuable," he said. "We see a great amount of production efficiency when it comes to harvest speed, number of hours in the field, lack of down time. That's really a huge payoff when it comes to a reason to have storage."
The Peterson family, of Loretto, Ky., had another reason to expand their storage -- quality.
The Petersons supply non-GMO corn for what they call the "original ethanol," the fast-growing whiskey market.
They've doubled their farm's storage capacity and invested in energy-efficient grain systems over the last five years. When they built two new grain dryers in 2013, they improved their energy efficiency 66%.
"With buyers that demand 14% moisture, high test weight, very good appearance, no odors and seven-day-a-week deliveries, state-of-the-art storage was the ticket to premium prices," said Bill Peterson, the senior partner in a three-brother and one nephew business operation. "We have a very strong local market, but you don't get in unless you have the quality."
Ruff thinks managing the stored crop's condition is worth the risk. "When it comes down to it, that opportunity makes more than what it costs you, or what your risk was, by using the basis to your advantage."
<b>A MATTER OF NECESSITY</b>
Ethan Markestad planted 400 acres of corn in 2008, a first for his farm in Maddock, N.D. He had about 70,000 bushels of storage, enough for the average 60 bushels per acre wheat crop and 35 bpa soybean crop.
"When you add corn into the mix, it doubles your bushels," Markestad said, noting that he now splits his crop mix fairly evenly between corn, soybeans and wheat. He more than doubled his farm's storage capacity to 180,000 bushels.
North Dakota's corn acres have increased 140% since 2002, despite USDA seeing acreage fall shy of 3 million this year. North Dakota also has 2.7 bushels of on-farm storage for every bushel of commercial storage, the highest in the major corn-growing states. The mismatch often gives farmers more leverage in the basis markets.
This year has been an exception to storage as a springtime moneymaker in North Dakota. Spring basis has widened because of the logistics logjam, Markestad said. But farmers are patient and plan to wait for better prices before opening the bin doors.
<b>FARMERS ADOPT A COUNTRY ELEVATOR MINDSET</b>
Farmers are utilizing their new bin space to play the role of a "mini-commercial," said Mike Hogan, a market adviser at Stewart-Peterson.
"A light bulb clicked on somewhere along the way and farmers realized they could capture the carry and pay themselves storage. Farmers are taking on that country elevator mindset," he said.
Hogan sees the industry moving toward a just-in-time pricing model where end users push the basis higher when they need to source grain. While that's already common in the ethanol market, "I think it's going to go more that route with elevators developing more of a spot business than a contract business."
Mumby agrees, and said he often wonders if grain originators understand the magnitude of storage shift. In his regular conversations with grain traders, originators first said they thought farmers were holding off on corn sales until the first of the year for tax purposes. Some corn came to market, but not the flood traders expected.
Then the thought was farmers would have to sell grain to pay property taxes and cash rents in late February and early March. Once again, no sales flood.
Now they think farmers will start selling once the new crop is in the ground, Mumby said.
"It seems like it's a constant series of almost wishful thinking on the originators' part that they're going to get the flow of corn to improve rapidly at some point in time," he said. For the past year or so, the major grain companies have cited slow farmer sales as a reason for poor results in their grain trading divisions.
"And it seems like the whole thing has changed from the 'farmer's got to sell it' to 'what do we do to make him sell it?'"
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