This article has been reprinted from the Oct. 11 USDA Grain Transportation Report.
In recent weeks, grain shippers have expressed concern over grain storage capacity this harvest, due to already low crop prices, strong fall grain production, and possible effects from Chinese tariffs on imported U.S. soybeans, which could further increase grain held in storage.
These factors—grain stocks, new production, storage capacity, and prices—are important determinants of the demand for grain transportation.
Grain stocks in early September were the highest seen in the last 20 years.
Similarly, fall production of corn, soybeans, and grain sorghum is forecast to be at near-record highs.
On July 6, China placed tariffs on U.S. soybean imports, and grain prices (and basis) have since declined significantly.
These factors are likely to contribute to more grain going into storage (subject to capacity constraints) and relatively low export transportation demand over the next few months.
This article summarizes relevant data on grain production, stocks, basis (the difference between a current cash price and the futures price), and storage capacity to explain recent trends and assess their effects on grain transportation.
Grain Stocks, Production, and Basis
Wheat production (harvested earlier in the summer), along with significant carryover of soybeans, boosted grain stocks into September.
According to USDA’s National Agricultural Statistics Service (NASS), total grain stocks were 5.2 billion bushels (bbu) as of September 1, 2018, the highest seen in recent years (Figure 1).
Old crop corn stocks were 7 percent lower than the same time last year, at 2.14 bbu. However, wheat stocks were 2.38 bbu, up 5 percent from last year, and old crop soybean stocks were 438 million bushels, up 45 percent from last year.
More grain is already entering the supply chain, including on and off-farm storage and transportation channels.
Farmers harvest corn, soybeans, and grain sorghum after September 1. As of October 7, farmers had completed 34 percent of the corn harvest and 32 percent of the soybean harvest.
Corn was 8 percentage points ahead of the 5-year average by this time, but soybeans were 4 percentage points behind.
NASS projects production of corn, soybeans, and grain sorghum to reach 19.9 bbu, 3 percent above last year, and slightly below the year of record corn production in 2016.
Figure 2 reflects a continued trend of increasingly large fall grain harvests, with corn and soybean production each forecast to increase from the previous year by 2 and 7 percent, respectively.
If realized, this would be a new record for U.S. soybean production.
Figure 3 shows an average of GTR Table 2 origin basis data by commodity and highlights how basis is affected by the Chinese tariffs.
Since July, each commodity has seen a decline in basis. Wheat saw a large decline, but part of the decline is a seasonal effect of the wheat harvest increasing supplies.
Soybeans stand out, with a drop from July to September.
The drop is atypical for the season, as soybean supplies would typically be at their scarcest during the pre-harvest, summer months, making basis in July and August at its highest for the year
The basis data helps to explain the high grain stocks, especially for soybeans. Basis is one of the main factors behind the decision to store or sell grain.
A low basis reflects a relatively low current price and/or a relatively high future price.
With relatively higher prices in the future, the incentive for farmers and elevators is to hold their grain and sell in the future.
Soybeans generally have a pronounced seasonal transportation pattern, peaking during and immediately after harvest.
Corn and wheat, in contrast, tend to stay in storage longer and have a less pronounced seasonal transportation pattern.
For this reason, the high soybean stocks are a clear reflection of low soybean demand, low basis, and a strong incentive to store.
Recent transportation data also reflects these trends.
This week, rail carloadings of grain, reflected in the four-week running average in GTR Figure 3, are below the prior three-year average for the first time since March.
Barge movements of grain on the Mississippi River have also been average or below-average the last four weeks, with unseasonably low shipments of soybeans (GTR Figure 10).
A Look at Possible Storage Capacity Constraints
High grain supplies—from record September 1 grain stocks and strong (post September 1) harvests of corn and soybeans— put pressure on grain handling, storage, and transportation systems.
As the corn and soybean harvests progress, grain can either go into storage or into transportation channels.
Tight storage capacity, enhanced by low demand for grain in the nearterm, is reflected in relatively low corn and soybean basis.
To better assess any potential storage constraints, Figure 4 plots total U.S. grain supplies—September 1 grain stocks plus production of corn, soybeans, and grain sorghum—and U.S. grain storage capacity over time.
Although grain is not harvested all at one time, nor does it all go into storage as the figure implies, Figure 4 provides important insight.
It shows that grain storage capacity and grain supplies have increased over the years.
It also suggests that pressure on the transportation network during the fall harvest months has been higher in recent years than in the past, where the total amount of grain already in storage prior to harvest and the amount produced during harvest exceeded the total volume of storage capacity.
In 2018, for instance, if no grain were transported, total grain supplies would exceed storage capacity by 447 million bushels (2 percent), slightly lower than in 2016 (616 million bushels).
However, there are additional factors at play compared to 2016.
One important factor is basis, which has been generally lower than previous years.
For instance, basis for Iowa soybeans averaged -$0.52 in September of 2016 and -$.70 in September of 2017 but was -$1.03 in the same month of 2018.
As mentioned previously, a lower basis tends to incentivize farmers to store.
Another factor is crop quality.
The Midwest has dealt with substantial rains which could affect basis and ultimately the decision to sell or store at harvest.
A limitation of Figure 4 is that it masks key geographic differences with respect to possible storage constraints.
Among the top 15 grain states (ranked by total storage capacity), grain storage is relatively scarce in Illinois, Nebraska, South Dakota, Iowa, and Kansas (Figure 5).
These states usually have a storage deficit each year, but notably this year’s deficit is an additional 401 million bushels greater in Illinois and 166 million bushels in Nebraska, compared to the prior 3-year average.
Under its United States Warehouse Act authorities, USDA allows emergency and temporary storage of grain to mitigate storage shortfalls.
Rules are specified in Section K of W A-402. As of October 5, USDA has authorized about 110 million bushels of emergency capacity and 852 million bushels of temporary capacity.
Grain supplies, in the form of higher September 1 stocks and fall production, along with storage capacity, have increased over time.
Stocks were already high earlier in September and will be boosted even higher by near or record corn and soybean production (if realized).
Low basis for corn, soybeans, and wheat may weaken the incentive for producers and elevators to sell now, which could lessen the demand for grain transportation in the near-term but increase pressure on handling and storage systems.
Any pressure would likely vary state to state.
In some areas, such as Illinois and Nebraska, storage capacity appears to be relatively limited, particularly compared to four or five years ago.