Sometime referred to as the cost of carry, a carrying charge has to do with the charges associated with storing and caring for physical commodities. This cost of physical commodities care may include such important factors as physical storage, insurance, interest rate futures generated by the commodities, and opportunity costs. In addition to these usual costs involved in caring for a commodity, other ancillary charges may also be included in the overall carrying charge.
An illustration of how the carrying charge works can be found in the example of grain. Since grain is a valuable commodity that is subject to decay, it is often necessary to take steps that will extend the life of the asset. One of the central means of preserving the grain is physical storage in a silo or other facility that helps to minimize the impact of temperature and humidity on the grain. This means the lease or construction of the storage facility, as well as the installation of systems that will keep the grain under optimum conditions.
Along with the physical facilities that protect the grain, there is also the need to plan for some type of protection in case the silo is damaged or the climate controls fail. This often comes in the form of insurance coverage. The premiums that are paid to maintain the grain insurance qualify are part of the overall carrying charge.
Resources that are utilized for the care of a commodity are often generated by securing investors who are willing to cover the costs. In the interim, those investments of resources are often generated with the expectation of a return. This return is often in the form of interest that is generated on the invested funds. Any interest that is paid out to investors is considered part of the carrying cost.
Essentially, any other cost that may be directly related to the proper maintenance of the commodity can properly be identified as a carrying charge. As long as the commodity is generated enough revenue to cover all associated costs and still generate a net profit, the commodity is generally considered to be worth retaining. However, once a commodity ceases to cover the total carrying charge, investors normally choose to withdraw support and seek other opportunities.
