Some elevators could finish harvest owning about 50% of their local corn and soybean crops, versus a typical 35% to 40%, according to a new CoBank report. This year’s trend was influenced when corn traded with a 5 handle. And the shift is bigger than one balance sheet.
“No one’s escaping the cost story here,” says Tanner Ehmke, CoBank’s lead economist for grains and oilseeds.
Farmers, elevators and the carriers that move their grain are all absorbing higher costs, and basis is where elevators can pass them back.
Four takeaways, from the report:
- Farmer selling has put more of the crop in elevators’ hands. Several elevators report they could exit harvest owning roughly 50% of the local corn and soybean crop, versus a more typical 35% to 40%. Farmers are selling into rallies, with corn approaching $5, and asking to be paid sooner. Many seem to remember holding grain last year for higher prices that never came.
- Elevators hedge that grain with short futures, so a rally means margin calls. Commercial traders hold one of the largest net short positions in recent years. Industry estimates put a $1-per-bushel rally across corn, soybean and wheat futures at about $9.6 billion in margin calls. The gain on the physical grain isn’t realized until it’s sold and shipped, which leaves a liquidity gap.
- Carrying grain costs more, and carry doesn’t make up for it everywhere. Higher prices and interest rates raise the cost of financing inventory. Wheat is the biggest concern, because available carry may not cover storage and financing. Soybeans offer less carry than corn, and corn has the most favorable carry.
- Freight costs could widen basis after harvest. A 50-cent-per-railcar-mile surcharge over 1,000 miles adds about 14 cents per bushel. If end users won’t absorb it, elevators recover it through weaker local bids. The report says current fuel costs may not yet be fully reflected. It also describes a compounding loop of slower movement, larger inventories, higher financing costs and bigger hedges. The conclusion is that borrowing needs will come earlier and last longer, and lenders should test borrowers against all of this.
Farmers sold outright, so the elevator owns the risk
“They were not doing HTAs,” Ehmke says. “They were taking cash across the scale.” Farmers were not signing basis contracts either. Ehmke says the reason is cost: “Farmers got to pay down cost.” The result: “They were selling it outright.”
Every bushel sold outright is a bushel the elevator now owns, and the price risk goes with it. Ehmke says elevators cover that risk in the futures market.
“And so now they have to short that position in the futures markets so that they are even financially,” Ehmke says.
That keeps the elevator neutral on price. It does not make the position free.
A near-record short position puts margin calls in play
The hedge that protects elevators on price creates a cash-flow exposure. Ehmke points to the CFTC Commitments of Traders report, where commercial short positions measure how much grain companies own.
“That position is now almost record large, and if there’s any movement in prices, they got to pay margin calls on that,” he says.
The CoBank report puts a number on it. Industry estimates peg a $1-per-bushel rally across corn, soybean and wheat futures at about $9.6 billion in margin calls for commercial grain firms. Ehmke says that is not today’s risk, because prices have been falling. But a company holding half the local crop on borrowed money has little room to absorb a sharp rally.
Carry, freight and wet grain add to the bill
Owning more grain costs more to hold.
“Interest rates are going up at a time when commodity prices are higher than they were last year, so their borrowing expenses are going to be higher,” Ehmke says.
The CoBank report says the market may not pay elevators back for storing it. Wheat is the biggest concern, because available carry may not cover financing and storage. Soybeans offer less carry than corn. Corn has the most favorable carry.
Freight adds another layer. The report’s example: a 50-cent-per-railcar-mile fuel surcharge over 1,000 miles adds roughly 14 cents per bushel. The wet harvest adds drying and blending costs, with high-moisture and sprouted corn and discolored soybeans.
Basis is where the cost could land on farmers
Elevators can pass costs back through basis. Ehmke says it has not happened yet.
“We have seen the basis out in the country has been weakening, but that’s mostly a seasonal trend,” he says.
Farmers who sold outright for cash have already locked in their price and are insulated for now. Ehmke says the exposure sits with farmers who left basis open.
“There’s a bigger risk for basis to widen over time.” He calls that atypical, since basis usually improves after harvest.
His outlook depends on how long elevator costs stay high.
“What it may do is it may slow the appreciation of basis at best,” Ehmke says. “In worst case scenario, it may actually go down.”
Liquidity is not the concern.
“When our customers have a liquidity crunch, the lender steps in,” Ehmke says. “And we know that it’s temporary.”
The report still expects grain companies to borrow earlier in the marketing year and for longer than usual. It tells lenders to test whether borrowers can handle large margin calls, expensive inventory and higher freight costs.
