When farmer's contract grain in months after the harvest month they will (in normal years) capture a positive spread. Ie March corn prices are higher than Dec corn prices. However the farmer also faces additional costs to carry the grain from Dec to March. These costs include interest expense and storage costs. As of now, our model only takes into account the benefits associated with the higher prices for later delivery months, but does not penalize the farmer for the costs associated with carrying that grain. I haven't thought this entirely through yet. But I think that if the farmer delivers grain in the harvest month (Dec for corn and Nov for beans) there would be no carrying costs calculated and added to the expense budget. However, if the farmer contracts for a later month, we'd ask the farmer the interest rate on the operating line and the costs of storage and calculate the costs per bushel for carrying those bushels to later months. And we could add that to the P&L and overall model as a new line item titled "Grain carrying costs". If some grain was sold for harvest delivery, some for January delivery, and some for March delivery, we'd calculate the total costs of carrying that grain and add it to the appropriate crop column in the income statement. I think that beyond making the model better, this feature would also make abundantly clear that moving out from Dec to March to pick up, for example, 18c of positive carry has costs equal to probably 4c a month of storage (12cents) plus interest carry equal to current corn harvest price $4.11/b x 3 months/12 months x 8.0% interest cost on line of credit (8 cents) for a total of 20 cents of costs associated with delivering in March instead of Dec. These costs would more than outweigh the positive 18c spread. Right now we do not add the incremental burden of 20c per bushel of carrying costs and pushing out deliveries to capture spreads only provides upside. This is not the right way to look at it or model the business. Hence the suggestion to add the cost of carry explicitly to the model.
When farmer's contract grain in months after the harvest month they will (in normal years) capture a positive spread. Ie March corn prices are higher than Dec corn prices. However the farmer also faces additional costs to carry the grain from Dec to March. These costs include interest expense and storage costs. As of now, our model only takes into account the benefits associated with the higher prices for later delivery months, but does not penalize the farmer for the costs associated with carrying that grain. I haven't thought this entirely through yet. But I think that if the farmer delivers grain in the harvest month (Dec for corn and Nov for beans) there would be no carrying costs calculated and added to the expense budget. However, if the farmer contracts for a later month, we'd ask the farmer the interest rate on the operating line and the costs of storage and calculate the costs per bushel for carrying those bushels to later months. And we could add that to the P&L and overall model as a new line item titled "Grain carrying costs". If some grain was sold for harvest delivery, some for January delivery, and some for March delivery, we'd calculate the total costs of carrying that grain and add it to the appropriate crop column in the income statement. I think that beyond making the model better, this feature would also make abundantly clear that moving out from Dec to March to pick up, for example, 18c of positive carry has costs equal to probably 4c a month of storage (12cents) plus interest carry equal to current corn harvest price $4.11/b x 3 months/12 months x 8.0% interest cost on line of credit (8 cents) for a total of 20 cents of costs associated with delivering in March instead of Dec. These costs would more than outweigh the positive 18c spread. Right now we do not add the incremental burden of 20c per bushel of carrying costs and pushing out deliveries to capture spreads only provides upside. This is not the right way to look at it or model the business. Hence the suggestion to add the cost of carry explicitly to the model.