Grain Elevators Facing Tighter Margins, Revenue Pressures in 2020
DENVER (December 4, 2019)—Grain elevators face significant challenges in the year ahead as they buy basis on corn, soybeans, and wheat at the highest levels seen in years. Basis for all three of the major grains is significantly tighter across the country from strong end-user bids, limited pipeline supplies, and lack of farmer selling amid an uncertain fall harvest, according to a new report from CoBank’s Knowledge Exchange division.
“In addition to having to buy more expensive basis, grain elevators are being compelled to offer farmers a range of incentives to sell bushels,” said Tanner Ehmke, manager of CoBank’s Knowledge Exchange division. “Lower rates on storage, free delayed pricing, and free grain drying are among those incentives, which are eating into the elevators’ revenues.”
Grain quality issues resulting from high moisture at harvest and frost damage on immature crops will also raise management costs for elevators, potentially resulting in greater losses to shrinkage and spoilage. A propane supply shortage in some regions is also driving up the cost of drying grain for many grain elevators.
Meanwhile, carry in the futures market for corn, soybeans, and wheat is trending smaller as basis strengthens. Futures carry on the Minneapolis soft red winter wheat contract has fallen nearly to zero amid a shortfall in supplies, while the Kansas City hard red winter wheat contract, which in recent years offered reliable profits for grain elevators, has also fallen sharply amid tight basis, the expectation for falling acreage, and a new variable storage rate.
Weather continues to be the major challenge for both farmers and grain handlers. Corn and soybean harvest in some regions of the Corn Belt will likely last into winter with total new-crop bushel inventories likely to remain unknown through winter.
However, grain elevators also have an opportunity to improve margins in an otherwise stressful year. Basis will likely soften as more bushels come to market as harvest operations conclude, giving grain handlers an opportunity to potentially buy cheaper basis. In regions where farmers harvested record yields, elevators can use the volume to make up the loss in margin.
“While grain elevator margins generally are expected to be down in the year ahead, grain handlers can profit from blending new-crop supplies with existing old-crop inventories, and those with reliable access to propane can profit from drying grain,” said Ehmke.
Watch a video synopsis and read the report, “Grain Elevator Outlook: Tight Basis Squeezes Grain and Oilseed Margins” at cobank.com.
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