They have endured much higher costs for storing grain and oilseed inventories [cost of carry] over the past year, finds a report from CoBank.
The study estimates that the interest-related cost of carry in the US in the 2023/24 crop year will rise to the highest on record: Corn is forecast to increase 21%, soybeans to 42% and wheat 50%, year-on-year.
Meanwhile, insurance costs have risen sharply following multiple weather disasters and insurance companies exiting agriculture to chase premiums in a rising interest rate environment. And transportation, labor, and energy costs also remain high or are still rising, putting more upward pressure on grain elevators, noted the publication.
But the rapidly rising cost of carry is motivating stakeholders in opposite ways, reads the report.
“Just as grain elevators are motivated to move inventory as fast as possible to lower carrying costs, processors and end users like flour millers, ethanol plants, feedlots and soybean crushers are motivated to delay ownership of commodities to reduce their own inventory costs,” said Tanner Ehmke, lead economist, grains and oilseeds, CoBank.
Inverted futures markets
The persistent inverse in futures markets, when later-dated futures contracts are priced lower than nearby contracts and do not cover the cost of storage, is really complicating matters for grain elevators, he said. They are penalized for storing grains and oilseeds. But, in such a scenario, farmers prefer to sell rather than retain commodities.
Cooperative elevators are required to buy and market their members’ grain and oilseeds, regardless of whether the economics of storing and handling commodities are favorable. Grain co-ops, though, have control over their local bid.
If interest rates maintain their current elevated level and futures markets remain inverted into the new crop year, many grain cooperatives will lower bids, and widen their basis, predicts Ehmke.
[Basis is the difference between the price of a given commodity in a local market subtracted by the price of that commodity in the futures market.]
Several factors are maintaining the inversion in the commodity futures markets, including drought in the US plains and Argentina, loss of production of grains and oilseeds in Ukraine due to ongoing conflict with Russia, other geopolitical concerns and rising global demand, added Ehmke.