Buffett’s Surging Silo Sales Boosting Cargill Costs: Commodities

In a year of record agricultural earnings in the U.S., Steve Ruh spent a chunk of his income to build what’s become an increasingly common sight at farms across the Midwest -- grain storage bins.

The Illinois corn grower started with 250,000 bushels (2 million gallons) of storage capacity in 2009 and added 100,000 this year to avoid wasting precious harvest time in line at grain elevators. He can now hold crops during gluts, hoping to sell at higher prices when grain is scarcer, and is storing half the 400,000-bushel corn crop this season at his farm in Sugar Grove.

“I like the control,” said the 42-year-old, who works 3,000 acres (1,214 hectares) of corn, soybeans, wheat and alfalfa. “This allows me to market 12 months out of the year instead of half that time.”

Corn-belt farmers like Ruh have pushed up U.S. oilseed and grain storage capacity to the highest in two decades, enriching bin makers from GSI Holdings Corp. to Brock Grain Systems, which is controlled by Warren Buffett’s Berkshire Hathaway Inc., while raising costs for Cargill Inc. and other grain traders.

“We are looking for 2012 to be a huge demand for storage,” said Doug Niemeyer, a general manager at Brock, which is a unit of Berkshire’s CTB Inc.

U.S. farmers, whose crop futures trade in Chicago and help set global grain costs, are gaining pricing power as the world shifts from grain surpluses to deficits, according to David Nelson, a global strategist in Chicago for Rabobank International.

Power Shift

“The increase in on-farm storage plus stronger farmer balance sheets has shifted power upstream toward the farmer,” Nelson said in a telephone interview. “With this year’s harvest, we’ve seen very little farmer selling, and storage has played obviously a big role in that.”

World corn reserves measured before the start of 2012 harvests in the Northern Hemisphere will fall to a five-year low and U.S. inventories on Aug. 31 are forecast to fall to the lowest since 1996, according to the U.S. Department of Agriculture.

The shift raised prices for buyers including Cargill, Archer Daniels Midland Co. (ADM) and Bunge Ltd. (BG) during the harvest that ran from September through December in North America. Generations of farmers often had to sell most of their stock at the lowest prices of the year during this period.

March corn futures for 2012 fell 2.3 percent to $5.8075 a bushel in Chicago at 2:15 p.m. local time, cutting the gain this year to 1.9 percent.

‘Incrementally Negative’

The swing back to farmer-owned bins can be viewed driving along Route 63 in Iowa and Interstate 74 in Illinois, the biggest corn-growing states, where scores of shiny galvanized- steel silos dot the fields.

U.S. farm income will reach a record $100.9 billion this year on higher crop and livestock prices, the USDA forecast Nov. 29.

On-farm storage for grains and oilseeds in the U.S. climbed to 12.5 billion bushels in December 2010, the most since 1989, according to the latest department estimates. Bin makers GSI and Brock say farmers are still adding more storage.

Rising grain costs and tighter supplies have already curbed profit for ADM, whose shares have dropped 8.8 percent this year while the S&P 500 Consumer Staples Index gained 6.4 percent.

‘Incrementally Negative’

As well as buying and selling commodities, the company also processes corn and soybeans to make biofuels, animal feed, sweeteners and starch. Burgeoning farm storage capacity is “incrementally negative” for grain processors, Christina McGlone, an analyst at Deutsche Bank AG in Greenwich, Connecticut, said in an Oct. 27 interview.

In Decatur, Illinois -- ADM’s hometown and a U.S. corn- processing center -- buyers of the grain paid an average premium of 18.2 cents a bushel above the Chicago futures price to take delivery of corn in October, the most in at least four years, Bloomberg data show. A year earlier, they were paying a 2.8-cent discount. Last month, the average cash bid was 21 cents above futures.

Premiums paid by export terminals near New Orleans for corn have jumped 7.2 percent in the past year and are 52 percent higher than the average from 2007 to 2010, according to USDA data.

The processors “are having to bid up corn to get corn out of someone’s hand, the farmer or elevator,” said Tim Lenz, 43, who farms 2,600 acres of corn, soybeans and wheat in Strasburg, Illinois.

‘Tricky Decision’

Lenz is holding 60 percent of his corn crop in his bins, up from 40 percent a decade ago, when he first added storage. “It’s not going to allow them to get cheap corn at the glut of harvest,” he said.

While storage bins help farmers wait out low prices, the growers have to contend with timing sales amid volatility, Lenz said. Most-active corn futures in Chicago have fallen by more than $2 a bushel since reaching a three-year high of $7.93 on June 9.

“It’s a tricky decision for farmers to own storage,” Bunge Chief Executive Officer Alberto Weisser said in an Oct. 27 interview. “It only makes sense for very large farmers.”

ADM and Cargill declined to comment on the impact expansion in farm storage is having on grain prices.

Cargill has been increasing its own storage because eventually grain has to move to the traders and processors for sale domestically and overseas, said Mark Klein, a spokesman for the Minneapolis-based company. Commercial storage held by companies has risen to a record 9.74 billion bushels, USDA data shows.

ABCDs’ Power

Cargill six years ago introduced a service to help build bins for farmers who contract to sell it grain, Klein said.

Illinois farmer Gary Schmalshof said he sold corn to Cargill for $7.40 a bushel in September, up from $6 a year earlier.

“They were afraid that corn would go into the bins and they couldn’t access it,” said Schmalshof, who’s storing 70 percent of his 550,000-bushel harvest in his bins to sell at higher prices in the future.

While adding storage gives farmers “a few more cards in your deck,” the so-called “ABCDs” -- ADM, Bunge, Cargill and French trader Louis Dreyfus & Cie. -- remain powerful players in the commodity markets, said Illinois farmer Joe Zumwalt, 33.

“We are able to gain a few more cents than before,” Zumwalt said. “They are going to be the 800-pound gorilla.”

Farm Consolidation

The combined storage capability of U.S. farmers and companies has expanded after 2004 as the corn crop ballooned to meet greater demand from the ethanol industry. Now, even as U.S. grain harvests shrink, farmers are still adding more bins. Consolidation among U.S. farms is also a contributor to demand, said Brock’s Niemeyer.

The average new bin has more than doubled in size to as much as 35,000 bushels in two decades, according to Assumption, Illinois-based GSI. Almost 40 percent of customers who bought on-farm storage in the U.S. in 2010 indicated that they intend to buy more in the next two years, according to a survey commissioned by GSI.

Tractor maker Agco Corp. bought GSI from private-equity firm Centerbridge Partners LP for $940 million in December.

“Farmers are acting much more sophisticated,” said John Henderson, GSI’s chief operating officer.

Terry Jones, a farmer of corn and soybeans on 10,500 acres in Iowa and Oklahoma, says corn can rise by as much as $1 a bushel between the end of the harvest and the following summer. He’s focused more on storage than buying land the last two years and has built relationships with livestock producers and ethanol mills.

“I like it when they call me because we know we are going to get a good price for our corn,” Jones said.

To contact the reporters on this story: Shruti Singh in Chicago at ssingh28@bloomberg.net; Jeff Wilson in Chicago at jwilson29@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net; Steve Stroth at sstroth@bloomberg.net

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