Storage calculator: does holding grain beat selling today?
Price gain against storage, shrink of capital and interest.
Storage vs. sell now
Storage vs. sell now
Does holding grain beat selling today?
Sell now wins · gain $0.35 − storage $0.25 − interest $0.14
Is it worth storing this grain, or should it be sold now?
Grain in a bin is money not yet collected, and it costs something to leave it there. The decision to store is a bet that the price gain will beat those costs, and the arithmetic is simple enough that the bet can be checked rather than felt.
Two costs are easy to forget. Commercial storage is charged per bushel per month and is visible. The interest on capital sitting in the bin is invisible, and on a five month hold it is often the larger of the two.
Worked example
- Cash price now
- $4.20 per bushel
- Expected later
- $4.55 per bushel
- Storage
- $0.05 per bushel per month
- Months held
- 5
- Interest
- 8% per year
- Price gain: $4.55 − $4.20 = $0.35 per bushel
- Storage: $0.05 × 5 months = $0.25 per bushel
- Interest: $4.20 × 8% × (5 ÷ 12) = $0.14 per bushel
- Net: $0.35 − $0.25 − $0.14 = −$0.04 per bushel
A 35 cent rally still loses 4 cents a bushel, because 39 cents of cost sat behind it. The market has to do more than rise for storage to pay; it has to rise by more than the carry.
How it works
The price gain is the whole reason to store, and it is the only input that is a forecast rather than a fact. Everything else is known. That asymmetry is worth keeping in view: the calculation is precise about the costs and speculative about the benefit.
Interest is charged on the value of the grain, not on a loan balance, because the money is tied up either way. Selling releases it, whether it pays down an operating note or earns a return elsewhere. The rate to use is whatever that capital actually costs or earns for the operation.
On farm storage substitutes a different cost for the commercial rate. The bin is already built, so the marginal cost is drying, shrink, aeration and the risk of quality loss rather than a monthly fee. Entering a lower storage figure reflects that, but entering zero overstates the case, because shrink alone is rarely zero.
net = (expected price − price now) − (storage per month × months) − (price now × interest rate × months ÷ 12)What a five month hold needs at different starting prices
Storage 5 cents a month, interest 8%. The gain in the last column is what the market has to deliver just to break even on the decision.
| Price now | Storage 5 mo | Interest 5 mo | Total carry | Rally needed |
|---|---|---|---|---|
| $3.80 | $0.25 | $0.13 | $0.38 | +$0.38 |
| $4.20 | $0.25 | $0.14 | $0.39 | +$0.39 |
| $4.60 | $0.25 | $0.15 | $0.40 | +$0.40 |
| $5.00 | $0.25 | $0.17 | $0.42 | +$0.42 |
| $5.50 | $0.25 | $0.18 | $0.43 | +$0.43 |
Common questions
What interest rate should I use?
The rate the money would actually cost or earn. If storing means carrying an operating note longer, use the note rate. If it means leaving cash idle, use what that cash would otherwise return. The point is the opportunity, not a bank statement.
Does this account for the futures carry?
Indirectly. If the expected later price is taken from a deferred futures month plus an expected basis, then the market carry is already in the number. Comparing that against the cost of storing is exactly how a commercial decides whether the market is paying to store.
What about shrink?
It is not a separate input, so it belongs in the storage figure. Grain drying down from a higher moisture loses weight, and bushels that disappear are a real cost per bushel sold. Adding a cent or two a month covers it for most situations.
Why does the answer flip when I change the months?
Because storage and interest both accumulate with time while the price gain does not automatically. Holding twice as long doubles the carry, so a rally that paid over three months may not over six.
Related
This tool is designed to help plan your overall portfolio and is not trading advice. You should carefully consider your portfolio, risk tolerance, and other metrics; Consult with your broker prior to making trading decisions