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Drive along Route 63 in Iowa or I-74 in Illinois and you’ll see them by the score: shiny grain silos, built of galvanized steel, dotting the fields of these top two corn-growing states.
The nation’s farmers have built up oilseed and grain storage capacity to its highest level in two decades. On-farm storage in silos (also known as bins) climbed to 12.5 billion bushels in December 2010, the most since 1989, according to the latest estimates from the U.S. Agriculture Dept. Bin makers GSI Holdings and Brock Grain Systems (controlled by Warren Buffett’s Berkshire Hathaway) say farmers are adding still more storage. Both companies expect a strong 2012 as a result.
The silos are the farmers’ most potent weapon in a struggle to loosen the grip of the agro-corporations—including Cargill, Archer Daniels Midland (ADM), and Bunge (BG) —which have long acted as middlemen, buying grain and oilseeds from farms to process themselves or to sell at a markup to customers such as ethanol manufacturers, livestock producers, dairy farms, and food companies. Farmers who lacked enough storage had to sell their autumn harvest immediately to the middlemen, who had the upper hand when it came to pricing.
The farmers are gaining more leverage. Grain prices were low a decade ago. In the last quarter of 2011, cash corn prices traded at their highest level. U.S. farm income reached a record $100.9 billion in 2011, the USDA estimated on Nov. 29.
Terry Jones, who grows corn and soybeans on 7,000 acres in Iowa, is building grain silos with the extra money that higher corn prices and selling some land put in his pocket. The third-generation farmer now owns more than 3.5 million bushels of storage capacity, including 400,000 bushels’ worth that he started building last year and will finish in 2012. Some years, corn can rise by as much as $1 a bushel between the end of the harvest and the following summer, says Jones. He’s also developed contacts with livestock producers and ethanol mills that call him directly when their corn supplies run short. “I like it when they call me because we know we are going to get a good price,” he says.
“The increase in on-farm storage plus stronger farmer balance sheets has shifted power toward the farmer,” says David Nelson, a global commodity strategist in Chicago for Rabobank International. In Decatur, Ill.—ADM’s hometown and a U.S. corn processing center—buyers paid an average premium of 18.2¢ a bushel above the Chicago futures price to take delivery of corn in October. That’s the highest October price in at least four years, data compiled by Bloomberg show. A year earlier, buyers were paying a 2.8¢ discount below futures. The processors “are having to bid up corn to get corn out of someone’s hand,” says Tim Lenz, who farms 2,600 acres of corn, soybeans, and wheat in Strasburg, Ill. Lenz is holding about 60 percent of his corn crop in his bins, up from 40 percent a decade ago, when he first added storage. Grain storage is “not going to allow them to get cheap corn at the glut of harvest,” he says.
Cargill has built more silos for its own use and helps construct bins for farmers who contract to sell the company their grain. Gary Schmalshof says 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,” says the Illinois farmer, who last month was storing 70 percent of his 550,000-bushel harvest in his bins. Rising grain costs and tighter supplies curbed profits in late 2011 for ADM, whose shares dropped 4.9 percent last year. The S&P Consumer Staples Index, of which ADM is a member, rose more than 10 percent.
Neither ADM nor Cargill would comment on how more silos affect grain prices. Bunge Chief Executive Officer Alberto Weisser cautions that using silos to wait for the best price is a hard game to win consistently. “It’s a tricky decision for farmers to own storage,” he says. “It only makes sense for very large farmers.”
For now, the farmers are savoring the power those silos bring. “I like the control,” says Steve Ruh, a farmer in Sugar Grove, Ill., who built storage in 2009 and more again this year. “This allows me to market 12 months out of the year instead of half that time.”
The bottom line: U.S. farmers are tapping record income to build more storage silos, lessen the power of middlemen, and help them time the market.