The Economics of Storage

1. The Economics of Storage AG BM 102

2. Introduction • One crop a year means storage in some form • No one will store without the expectation of making money • Economics of storage explains this

3. The economics of time • Money now more valuable than money later • Interest on deferred money a cost • Also physical costs of storage • Also risk • Deterioration

4. A simple model • 2 periods – one with harvest, one without • Costs money to store until next period • Market equilibrium is total supply = total demand • Total demand = demand now + demand later

7. To transform future demand to the present, storage cost must be subtracted from the price. This is a vertical shift down.

10. To get total demand, add the demand for each period together horizontally. This can be done algebraically or by using carefully drawn graphsThe place where total supply crosses the supply curve determines the price now and the quantity supplied

12. The quantity stored, which is also the quantity demanded later, is found by finding where the price now, crosses the demand curve for later, adjusted for the storage costs, and then taking this quantity up to the original demand curve for the later period. The price later will be the price now plus the storage costs.

13. Economics of Storing Grain

14. Why Store Grain? • Market incentive • Marketing Flexibility • Time Management

15. BasisThe difference between the price on the futures market and your local price at some point in time

16. Example • Price in Chicago Thursday $4.40 on the December 2013 corn contract and $4.61 on the May 2014. Price in Pennsylvania on Monday was $4.26. So the time value of storing for two months until December is 14 cents. The premium to store until May is 35 cents.

17. Market Incentive Corn • Price in Chicago Dec = $4.40 • Price in Chicago May = $4.61 • Price in SE PA now = $4.26 • Avg May Basis = $0.29 • Expected Price May = $4.61+$0.29=$4.90 • Expected Market Incentive • $4.90 – 4.26 = $0.64

18. One way to look at this is the $0.64 has two pieces • $0.35 for time and $0.29 for distance, which total $0.64 • Now compare this to your storage costs

19. Costs to Consider • Ownership Costs of Facilities and Equipment • Opportunity cost for value of grain • Extra shrink and drying costs • Dry matter loss • Electricity costs for aerating and moving • Labor for checking and handling

20. Fixed Costs • Depreciation • Interest • Repairs • Taxes • Insurance • A new bin costs about $2.00/bushel or more for 10,000 bu. bins or larger. Smaller bins will cost a bit more per bushel

21. Fixed costs are only an issue until the bins are built. After that they are sunk

22. Variable Costs • Interest on grain • On-farm drying costs • Shrinkage costs • Labor Costs • Quality Discount • Other

23. Variable Costs

24. Do You Store? • Based on these costs and prices- store your corn • Each year is unique and also within a year • The incentive is 64 cents and your costs are 18 cents. This year the market is saying “Store your corn!”

25. Is it a good idea to store your own grain? • How much is the expected price differential? • How much are your variable costs? • Do you want the headache? • Do you already own the bin? • Are the time management issues important enough to offset any storage losses

26. Storage Summary • Economics of storage straightforward • Someone must do it • Prices give incentive • Market must reflect storage costs