A Better Grain Price Has to Cover the Cost of Waiting

Now that harvest is underway (finally, here in Iowa at least), farmers have some grain to sell. Harvest also brings a decision for your unpriced bushels: sell now or hold for a better price. Holding grain isn’t free, so you need to consider that cost when determining if there is a benefit to the carry in the market.

Start with the costs that change because you hold the grain. For commercial storage, include the elevator’s storage charges and any other additional fees. For on-farm storage, consider additional handling, drying, aeration, shrink, or quality losses. Count only costs added by waiting, such as extra drying needed for storage. Use your own costs and avoid counting the same cost twice.

Existing bin ownership costs still belong in your overall profitability analysis. However, depreciation and other costs incurred whether you sell or store should not determine this particular decision (a “sunk” cost). Owning the bin does not make storage free; it means some costs are already committed.

If your operation carries operating debt, waiting has a cost that needs to be calculated before you decide what a better price looks like. Interest on debt you could repay by selling is a cost of carrying that grain.

For example (assumptions, not necessarily market prices), let’s say you have 100,000 bushels of corn that could net $5.00 per bushel today. Selling would provide $500,000, all of which would reduce an operating loan charging 7.25% interest. Holding that grain for four months adds approximately $12,083 of interest:

$500,000 × 7.25% × 4/12 = $12,083, or approximately 12.08 cents per bushel.

Assume another 20 cents per bushel of storage and other holding costs for those four months. With no change in saleable bushels, your total cost of waiting is approximately $32,083, or 32.08 cents per bushel. The later net price must reach approximately $5.32 just to match selling today, before income tax effects.

If you wait and receive $5.20, your grain check is $20,000 larger. However, you spent approximately $32,083 to get that increase. You are approximately $12,083 worse off even though you received a higher price.

When developing your storage plan, knowing your holding costs will help you determine whether storing that grain will increase your net income. Since your farm has cash needs as well, develop your storage plan alongside your cashflow forecast to determine when you will need to turn inventory into cash. Work through those numbers with your accountant and grain marketer before the payment date makes the decision for you.