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Agricultural News

CoBank Report Says Outlook for Grain Elevators Reliant on Trade, Logistics, Competitor Production

Wed, 05 Dec 2018 11:34:05 CST

CoBank Report Says Outlook for Grain Elevators Reliant on Trade, Logistics, Competitor Production Average grain elevator margins are expected to be relatively normal this year for most of the Midwest. However, according to a new report from CoBank’s Knowledge Exchange Division, elevators should be cautious about the outlook, as several variables are currently in play that could affect elevator margins.

Corn and wheat margins look solid on good carry and expected basis improvement, although corn ownership may be difficult for some elevators to obtain. Soybean margins for the year ahead face some uncertainties. Elevators are confident they will make a margin, but the question is when. Trade, logistics, and export competitor production will be major factors impacting margins going forward.

“Overall, soybean basis appreciation will face resistance over the next year,” said Will Secor, grain and farm supply economist with CoBank. “Ample supplies and weak demand will continue to hobble the market. With farmers looking to store soybeans and elevators wanting to own bushels at harvest, there is a risk that elevators will narrow the harvest basis to gain ownership on the farmers’ remaining unsold bushels”

Secor said this basis-ownership tightrope walk is not new for elevators, but the risk is enhanced this year for soybeans.

Corn basis remains relatively strong considering the large crop, thanks to strong domestic demand. Ethanol use is expected to increase year-over-year, and feed demand will remain robust as cattle, hog, and poultry numbers continue to increase. Amid this strong demand, elevators will likely see strong basis appreciation this year.

“This basis appreciation combines with significant futures market carry to provide a strong profit opportunity for elevators,” said Secor. “Fewer corn bushels are available to elevators this year, so the key is obtaining ownership.”

Wheat margins will be strong as elevators benefit from healthy carry on old grain blended with this year’s quality crop. Futures market carry will incentivize storage of these large crops, while basis will likely strengthen for corn and wheat. It is unclear how much basis appreciation soybeans will see amid weak demand and a record crop.

Trade Disputes Set the Stage

As the U.S.-China trade dispute moves into high-gear, the record supply of soybeans matched with weak demand will hinder market pricing. Drought conditions in the EU, Russia, Ukraine and Argentina give the U.S. wheat markets promise amid this year’s large yields.

Current U.S. steel and aluminum tariffs have raised the cost of steel for grain bin construction by 25 to 33 percent. The tariffs have discouraged elevators from constructing new storage facilities until the tariff issues are resolved.

This is the fifth consecutive year of above trend U.S. corn and soybean yields. Slow soybean exports will force many elevators to store more soybeans longer. Carrying more soybeans will increase storage costs for many elevators this year.

“Storing soybeans is slightly riskier because high oil content increases the spoilage potential,” said Secor. “Well-managed soybeans stored in bins with adequate aeration can be stored longer.” However, soybeans in piles or ag bags stored for any significant length of time after winter face significant spoilage risks.

New, Unique Trade Routes Explored

“Transportation is shaping up to have a neutral impact this year,” said Secor. “New and unique trade routes are being explored in response to the lack of soybean trade with China.”

Elevators in the Northern Plains are shipping some soybeans to St. Louis, loading them on barges and exporting them through the Gulf. However, the cost is high and St. Louis port and barge infrastructure cannot handle all the soybean exports typically destined for China.

“Elevators near the Canadian border may ship soybeans to Canada,” said Secor. “Canada will likely ship more soybeans to China.” However, it is unclear what volumes will move through these non-traditional routes.

Barge rates have returned to the three-year average after being above this metric for several months this year. High water and river infrastructure repairs and closures in 2018 had pushed barge prices up.

Rail cars’ prices on the secondary market are in line with three-year averages, but fuel surcharges and tariff rates continue to rise. On a positive note, most rail carriers are servicing their grain customers well. As a result, rail issues are not expected going forward.

Truck driver costs, availability and quality will continue to be an issue for grain elevators. A strong economy and low unemployment will keep truck drivers in high demand. Elevators that truck most of their grain will face higher diesel prices and higher truck labor costs again in 2019.

To read the full report, “Grain Elevator Outlook 2018/2019,” visit cobank.com.

Source - CoBank



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