Grain elevator operators set sights on improved margins

by Eric Schroeder
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DENVER, COLORADO, U.S. — Wide carry in futures markets, weak harvest basis and low transportation rates may provide U.S. grain elevator operators access to strong margins, according to a new report from CoBank’s Knowledge Exchange Division. CoBank is a $124 billion national cooperative bank serving industries across the United States.

In the report, “Who Will Own the Grain? Elevators Eye Improved Prospects,” the study’s author Will Secor identifies several factors that are expected to pave the way for positive margins in the 2018 crop year.

“The 2018 crop year is likely to offer much better prospects to elevators than producers,” Secor, an economist with CoBank Knowledge Exchange, wrote in the report. “Wide carry in futures markets, weak harvest basis, and low transportation rates should provide opportunities for grain elevators to secure healthy margins. A wet fall in the Eastern Corn Belt and Northern Plains will also improve drying revenue in these areas. Demand growth is critical to reduce large stocks and support appreciating basis.

“Storage will come up short in many areas of the Corn Belt and Plains this year with large carryover stocks and above average new crop production. With these large supplies, futures markets are providing significant returns to storage, especially for corn and wheat. Long-term carry for corn and soybeans may be threatened by Brazilian production issues as a La Niña begins to develop.”

A potential growth driver for grain elevator operators in the year ahead is storage, where expansive ending stocks and large new crop production have created an attractive carry in futures markets, particularly for wheat, Secor said.

“These will provide elevators with returns to storage if they can find room to store grain and gain ownership of it,” he said.

Exactly how much grain storage space is available varies across the United States, Secor said. In the Southern Plains, many elevators have wheat in long-term storage dating back to 2015, he said, while elevators in the Western Corn Belt and plains, especially Nebraska, Iowa and Kansas, could feel the squeeze or storage shortages.

In some cases elevators may be forced to rely on temporary storage like bunkers and ground piles for potentially long periods of time, Secor said.

Another factor at play is the futures carry.

“Weather concerns tightened the carry for wheat and soybeans during the early summer months before widening through the end of the summer,” Secor wrote. “The carry offered by futures markets for Kansas City and Chicago wheat currently approach the full cost of carry for many elevators with storage costs of 5¢ a bushel per month. However, when CME variable storage rates are used, this full cost of carry drops significantly. The carry for Minneapolis spring wheat and corn is hovering around 65% of full carry. Soybean carry is around 60% of full carry. Many elevators will look to gain ownership and store wheat and corn with their relative carry advantage over soybeans.”

Last year, grain elevator operators were faced with a basis that fell to harvest lows and never rebounded. But during the 2018 crop year elevators will look to capitalize on a weak harvest basis that is expected to strengthen throughout the year as processors and ethanol plants work through grain stocks early in the year, Secor said. He did caution, though, that significant gains in futures prices or another bumper crop in 2018-19 may keep basis levels from strengthening.

“Increased on-farm storage capacity and local end-user demand growth may also restrict basis appreciation this year as much of this grain will flow straight from farmer bins to local end-users,” he said. “Look for this dynamic to play a potentially large role this year with farmers hesitant to sell grain at low prices and farmers’ ability to store grain improving this year from smaller crops and more storage.”

A final factor offering potential opportunities for margin growth for grain elevator operators is low transportation rates, Secor said.

Improved river conditions have kept barge rates at a reasonable level, while railcar availability has been ample due to fewer shipments in the energy sector. The one transportation mode posing a hurdle is road delivery, where diesel prices are up 17% from last year, Secor said.

“Hurricane Harvey contributed to a spike in diesel prices, which were already higher year-over-year since the beginning of December 2016,” he said. “Although there are agricultural exemptions from the new U.S. Department of Transportation Electronic Logging Device (ELD) regulations, some elevators will need to comply if they truck grain outside of the state or more than 150 miles from their location across state lines. If the elevator contracts this service they may face increased fees despite the agricultural exemptions, if the company they contract faces an increased compliance cost.” 
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