Agricultural News
Co Bank Expects Margins for Grain Elevators to be Tight in 2020
Tue, 31 Dec 2019 15:10:18 CST
It's not just farmers experiencing lower returns this past year, according to CoBank grain elevators could see their margins drop compared to 2018. Higher basis for corn, soybeans and wheat bear the brunt of the blame for elevators' anticipated lower returns.
"In addition to having to buy more expensive basis, grain elevators are offering farmers incentives to sell bushels such as lower rates on storage, free delayed pricing and free grain drying," said Tanner Ehmke, with CoBank's knowledge exchange division. "Lower-quality and high-moisture grain coming in from wet fields also raises management costs."
Propane shortages earlier this year and now also continue to challenge elevator revenue. In addition, drying wet grain could lead to shrinkage or mystery loss, adding to bushels lost and overall cost for elevators.
Challenges from 2019 will likely have a long shadow into the next year.
"Grain elevators' margins will be compressed in 2020 by the tightness in basis, diminishing carries in futures markets, lost revenues from free DP, reduced storage fees, free grain drying and higher management cost with low test-weight or high-moisture grain," Ehmke said.
Here's a breakdown of the challenges crop by crop.
Corn
Weather challenges will continue to plague elevators.
"The general corn quality in 2019 is below average," said Charles Hurburgh, Iowa State University Extension, in a recent blog post. "Immature corn has lower test weight, lower protein content and poorer storability ."
Harvest basis for corn was recently at multi-year highs, according to Ehmke. For example, in central Illinois corn hit -8.5 cents per bu. basis compared to -31 cents per bu. in 2018 and -27.5 cents per bu. in 2017. Elevators count on cheaper basis at harvest and that really didn't happen like normal this year.
"Elevators are also struggling to gain ownership of corn," Ehmke said. Some are offering farmers freebies such as delayed pricing or grain drying. It might increase their grain in storage, but it will further erode profit margins for many elevators.
Soybeans
Basis for soybeans recently rebounded to -5 cents per bu. in central Illinois, according to research from USDA AMS. In 2018 it was -55 cents per bu. and -18 cents per bu. in 2017, clearly 2019 harvest concerns have made their mark.
Harvest issues aren't just raising basis, it's impacting storability, too. Unlike corn, soybeans are more fragile and present more challenges when drying. This means more time, money and energy will need to be expelled on the legume.
"There is risk of fire when drying soybeans," said Kenneth Hellevang, North Dakota State University Extension, in a recent article. "Monitor the dryer continuously to limit fire potential."
Wheat
While wheat is typically a reliable revenue generator for elevators, that changed drastically this year, said Ehmke. "The HRW (hard red winter) and SRW (soft red winter) spreads for the December 2019 and July 2020 contracts have steadily deteriorated since peaking this summer with the Dec. 2019 to March 2020 spread on the Kansas City HRW contract."
It topped in July at 24 cents per bu. and fell to 3 cents per bu. by late November, Ehmke added. Carry in Chicago SRW contracts has virtually disappeared.
Wheat basis, however, has strengthened with corn and soybeans. In July it was -25.75 cents per bu. and strengthened to -10 cents per bu. in late November, according to CME Group, CoBank and Minneapolis Grain Exchange. Improved shipping pace and strong domestic demand are the likely drivers behind this stronger basis.
"In the northern plains, hard red spring basis has skyrocketed on fears of reduced availability of quality milling wheat due to wet and snowy weather during harvest," Ehmke said.
Elevators will still have opportunities to improve margins for 2020.
"Basis will likely soften as more bu. come to market as harvest operations conclude, giving grain handlers and opportunity to potentially buy cheaper basis," Ehmke added. "Grain handlers can profit from blending new-crop supplies with existing old-crop inventories, and those with reliable access to propane can profit from grain drying. And regions of the country where farmers harvested record crop yields, elevators can make up the loss in margin with greater volume."
Source- Co-Bank
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