Does it pay to store grain? I'm asked this many times and I give the usual consultant's answer: It depends.

It really does depend on a number of factors. Several of our clients in South Dakota can pay for grain bins easily by storing grain and waiting for the basis to improve. That's not the case as you get closer to river terminals because the basis swings aren't as dramatic. But in that part of the country it pays to store grain, at least for awhile.

On the other hand, some of the most successful farmers I know have very little grain storage on their farms. My partner, Terry Jones, says having limited storage forces him to be thinking about what he'll do with his crop as, or before, he plants it. Others who have storage for their whole crop often don't plan ahead and think, "I can always store it."

Remember, to not decide is a decision, and the failure to plan is a plan to fail.

It costs money to store grain and the farmer always pays it. Storage costs are the most obvious, and I have a number of clients who say, "Don't count storage costs, Moe, because I have the grain bins and they're paid for." You really need to count storage costs, even if grain is stored on-farm.

Let's look at the costs of holding grain over and above out-of-pocket storage costs.

The interest, handling, shrink and quality deterioration can add up to 23/month for corn and 6-7/month for soybeans. These costs are in addition to storage.

Some of these costs you don't write a check for, such as shrink, handling and quality deterioration. But they're still costs and they really add up. An elevator operator in eastern Iowa says, "If you put 80 soybeans in a bin and put a fan on them to bring them down to 50 so they keep, the shrink is like having dollar bills going out the top of the bin."

We have a client in South Dakota who stored 50,000 bu of beans for five months and took out 1,200 fewer bushels. This is 2.4% shrink. On $5.20 beans, that's 12-13/bu.

Just six months of these total costs on a 150-bu corn yield can amount to $30/acre. For a 50-bu bean yield, it can be $22/acre. On 1,000 acres, this totals $26,000.

If you add storage costs, the total can double. If you hold the grain for a year, the total cost more than doubles as quality deterioration becomes an increasing cost.

Farmers are among the few business owners who hold physical inventory. In fact, a new concept implemented in businesses the last 10 years has been JIT (Just-In-Time) inventory. Companies like Cargill, ADM and John Deere spend a lot of time trying to minimize inventory because they know it costs them money to hold it. The costs they have minimized are the same costs you pay in holding grain.

Owning the grain on paper is a much more cost-effective method of ownership. Buying a call option allows you to re-own the grain at a fraction of the cost of holding the inventory. A rule of thumb I use is three months interest savings alone will pay for a re-ownership strategy. You then have most of the upside potential and your downside is protected because the grain is sold.

That's the essence of risk management - protecting the downside and leaving the topside open.

One final point: Make sure the carry in the market offsets your costs of holding grain. Some people like to brag about getting $2.25 for their corn for June delivery when, in fact, a $2.10 bid today is more net dollars in their pockets.