Grain Storage Investment: A Study In Risk And Reward

Investment in grain storage illustrates a number of risks, including the risk of loss, spillage, insect attacks, mould, and dry matter loss. Grain storage is often used to maintain a uniform supply of food for consumption, for the domestic and export market, and to provide a buffer stock for contingencies such as drought, floods, and war. However, storing grain can be costly, and farmers often sell a large proportion of their produce at harvest when prices are low. Investment in bulk-handling equipment can result in major cost savings, but it is important to consider the risks associated with grain storage and one's own risk profile and goals before investing.

The risk of labour problems, strikes, etc

Investment in grain storage illustrates a number of risks, including the risk of labour problems and strikes. Grain storage is often costly, and losses in storage are considered significant. These losses are mainly attributed to spillage, insect attacks, mites, rodents, moulds and dry matter loss due to respiration. In Southeast Asia, for instance, grain losses in storage range from 5% to 15%.

Despite the desire to store grain to cover future food and cash needs, farmers often sell a large proportion of their produce at harvest when prices are low. This is often due to the need to satisfy immediate cash requirements after the harvest. There is also a risk of losses and the unpredictability of future prices.

Storing grain at commercial elevators can be expensive, and by investing in your own system, you can avoid ongoing storage fees, handling charges, and transportation costs. However, it is important to manage your futures and basis price risk according to your own risk profile and goals.

Anyone looking to invest in grain futures should be aware of the substantial risk of loss. A grain futures contract is a legally binding agreement for the delivery of grain in the future at an agreed-upon price. An investor could lose more than they originally invested, so only risk capital should be used. Risk capital is the amount of money that an individual can afford to invest, which, if lost, would not affect their lifestyle.

In developing countries, investment in bulk-handling equipment can result in major cost savings due to the reduction in demurrage charges and downtime. This type of investment can also reduce the risk of labour problems and strikes.

The risk of loss due to weather, pests, and changes to global demand

Investment in grain storage illustrates several types of risk, including the risk of loss due to weather, pests, and changes to global demand.

Firstly, grain storage can be costly, and there is a risk of losing money if the grain is not sold at a high enough price to cover these costs. This risk is particularly relevant for farmers, who often sell a large proportion of their produce at harvest when prices are low, either to satisfy immediate cash needs or because they regard storage as too expensive or risky.

Secondly, grain storage is subject to various physical risks, including spoilage due to moisture, pest infestation, and mould. These factors can lead to significant losses in storage, with reports of grain losses in Southeast Asia ranging from 5% to 15%. Additionally, grain storage structures can develop hazardous atmospheres due to gases given off by spoiling grain or fumigation, posing a risk of suffocation for workers.

Thirdly, there is a risk of loss due to changes in global demand. Grain is often stored to maintain a uniform supply for domestic and export markets, but changes in global demand can affect the price of grain, making it difficult to predict future prices and plan storage strategies accordingly.

Finally, grain storage presents safety risks to workers, including falls from height, entanglement in mechanical equipment, and grain entrapments or engulfments. These risks can lead to serious injuries or even death, highlighting the importance of proper safety measures and maintenance of grain storage facilities.

The risk of losing more than originally invested

Investment in grain storage illustrates the risk of losing more than originally invested. This is due to the high costs of storing grain, which can be attributed to spillage, insect attacks, mites, rodents, moulds and dry matter loss due to respiration. In Southeast Asia, for example, grain losses in storage range from 5% to 15%.

Storing grain at commercial elevators can be costly, with ongoing storage fees, handling charges, and transportation costs. By investing in your own system, you can avoid these costs and maintain the option to sell to other grain-buying locations. However, it is important to manage your futures and basis price risk according to your own risk profile and goals.

Grain futures contracts are legally binding agreements for the delivery of grain in the future at an agreed-upon price. The risk of loss is substantial, and an investor could lose more than their original investment. Therefore, only risk capital should be used, which is the amount of money that an individual can afford to invest without affecting their lifestyle.

Farmers often sell a large proportion of their grain produce at harvest when prices are low. This is because they regard storage as too costly, risky, or unprofitable in relation to other investments. The risk of losses and the unpredictability of future prices are significant factors in the decision to sell grain immediately after harvest.

The risk of long-term storage of grain

Secondly, there is a financial risk associated with the cost of storage. Storing grain at commercial elevators can be expensive due to ongoing storage fees, handling charges, and transportation costs. By investing in their own storage systems, farmers can avoid these costs and maintain the option to sell to other grain-buying locations. However, this requires a substantial upfront investment, which may not be feasible for all farmers.

Another risk is the unpredictability of future grain prices. Farmers may be forced to sell their grain immediately after harvest when prices are low to satisfy cash needs or cover debts. Storing grain for future sales carries the risk of losses if prices drop or if the stored grain deteriorates in quality. This risk is particularly relevant for deficit producers who need to generate cash flow soon after the harvest.

Finally, there is the opportunity cost of investing in grain storage. Farmers must consider the potential returns of investing in grain storage versus other investments such as cattle or alternative crops. The decision to invest in grain storage depends on the farmer's risk profile, goals, and the overall market conditions.

Overall, the long-term storage of grain carries several risks, including physical losses, financial costs, price volatility, and opportunity costs. Farmers must carefully consider these risks and their own circumstances before deciding whether to invest in grain storage.

The risk of not managing futures and basis price risk according to your own risk profile and goals

Investment in grain storage illustrates the risk of not managing futures and basis price risk according to your own risk profile and goals. Grain storage is often used to maintain a uniform supply of food for consumption and to provide a buffer stock for contingencies such as droughts, floods, and wars. However, it is important to consider the potential losses associated with grain storage, which can be significant. These losses can be attributed to various factors such as spillage, insect attacks, mites, rodents, moulds, and dry matter loss.

Additionally, there is a risk associated with the unpredictability of future prices. Farmers often sell a large proportion of their produce at harvest when prices are low, as they may need to satisfy immediate cash needs or regard storage as too costly or risky. By investing in grain storage, farmers can avoid ongoing storage fees, handling charges, and transportation costs associated with commercial elevators. They also gain the optionality to sell to other grain-buying locations if basis opportunities arise throughout the marketing year.

However, it is crucial to manage futures and basis price risk according to individual risk tolerance and objectives. Grain futures contracts are legally binding agreements for the delivery of grain in the future at an agreed-upon price. The risk of loss in grain futures investments is substantial, and it may not be suitable for everyone. An investor could potentially lose more than their initial investment, and therefore only risk capital should be used. Risk capital refers to the amount of money an individual can afford to invest without affecting their lifestyle if lost.

By considering your own risk profile and goals, you can determine the appropriate level of exposure to grain futures and basis price risk. This involves assessing your tolerance for risk, your financial capabilities, and your objectives for investing in grain storage. By managing these risks effectively, you can avoid potential losses and maximise the benefits of grain storage according to your specific circumstances and goals.

Frequently asked questions