Grain storage decisions more complex than pure economics

When it comes to farmers storing grain, there are the “market-responsive” people, the “store-and-ignore” types, the “cash-poor crowd” and the “tax-avoiding gang.”

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That’s according to a recent paper by a team of University of Illinois and University of Missouri economists, which makes it clear that not all farmers manage their stored grain according to strict economic theory.

Why it matters: Researchers examined what factors influence the decision to store or sell grain.

The paper, titled “Commodity Storage and the Cost of Capital: Evidence from Illinois Grain Farms,” says higher capital costs — mostly made up by the interest on borrowed money that could be covered by grain sales — affect the storage decisions of some but not all farmers.

“We find farms do respond to changes in capital costs when choosing inventory levels,” says the paper by Joseph P. Janzen, Nicholas D. Paulson and Juo-Han Tsay.

“At the same time, there is a null effect (zero impact) for other (farms) who ‘store and ignore’ changes in storage costs.”

According to the research, published in the American Journal of Agricultural Economics, farmers in aggregate are likely to sell four per cent more of their stored grain every time capital costs go up by one per cent.

However, that average disguises major differences between the market-responsive and the store-and-ignore groups, in terms of both the amount of grain that will be moved by individual farmers if capital costs go up, and in terms of which sort of farmer is in which group.

“The effect is strongest for farms that hold the smallest inventory levels after harvest … where the magnitude of the effect is roughly between four and six percentage points for each one percentage point change in capital costs,” the economists write.

“Second, there is a null effect among farms that hold 100 per cent of production or more in inventory. These high-inventory farms do not respond to changes in capital costs when determining inventory levels.”

The research is based on over 20 years of financial statements of almost 3,000 Illinois corn and soybean farmers, although most in the study are represented by only a few years of data because it came from membership in voluntary farm management clubs.

The economists think that farmers with less grain in store at the beginning of the year might be moving it more aggressively when borrowing costs change because they are also carrying a higher capital cost burden.

Why almost 40 per cent of farmers don’t move any grain at all by the end of the calendar year and seem immune to interest rate changes isn’t as clear.

Among this group, covering capital obligations might not be such a concern. Also, many farmers might be attempting to minimize their tax bills by pushing grain sales into the next calendar year. For farmers on cash accounting, that’s common. The paper says if farms have also done this in past years, it can become almost unavoidable.

“For these farms, the only way to avoid a substantial tax liability is to continue storing commodities at year-end (creating a) tax shelter treadmill.”

The researchers note that the market-responsive farmers appear to be affected by government payouts, as happened between 2016 and 2020. If they’re getting payouts, they tend to be less aggressive with grain sales, suggesting that government cash in hand is fulfilling that need for revenue.

Janzen, Paulson and Tsay recommend more research into the impact of tax planning on farmers’ grain storage actions. The impact of government payouts on farmer marketing would also be worth exploring.

“ … the significant number of farmers holding at least one year’s production in inventory suggests the holding period for some inventories may be longer than is economically optimal in the absence of alternative motives for storage.”