Factor in all costs when deciding to store grain
As farmers harvested a poorer-than-expected corn and soybean crop in 2012, many considered
whether to hold the grain and hope for higher prices or sell it right out of the field. In most cases,
farmers fared better by skipping storage and heading straight to the elevator, says Corinne Alexander, a Purdue University agricultural economist.
"In short crop years, we tend to see prices peak either before or during harvest and decline through the remainder of the marketing year," Alexander says. "The market gave a strong signal to farmers to deliver early and at harvest because storage wouldn’t be profitable."
In typical years, on-farm storage can increase income by giving farmers more marketing options. The key is to consider all costs before making storage decisions.
Fixed costs include depreciation, interest on average investment, insurance, taxes, and repair and maintenance. If grain can be stored in existing facilities, the ownership costs (depreciation, return on investment, maintenance and insurance) are not included in the analysis of whether
to store grain, says Bob Wisner, an economist with the Agricultural Marketing Resource Center at Iowa State University.
"Even if no money is borrowed, there is an interest cost for
Factor in Storage. "These costs are incurred whether grain is stored or sold from the field," he notes. "Therefore, they do not affect the annual decision of whether or not to store grain."
If grain is stored commercially, the storage charge should be included because the charge is only
incurred if grain is stored. Storage charges vary, but they are usually fixed for the first few months with an additional charge for each month thereafter. Some elevators charge a daily rate.
Storing grain has many hidden costs, including depreciation, shrinkage and quality. Another example is the interest lost by having money tied up in stored grain inventory, Wisner says.
"If a producer has a loan, the loan can be repaid with the proceeds from the sale of grain," he says. "So interest expense is reduced if the grain is sold at harvest." However, if the grain is stored, the loan is not repaid and interest continues to accrue. In that case, the cost of storing grain is the additional interest expense incurred.
Even if no money is borrowed, there is an interest cost for storing grain, Wisner says. If the grain is sold, the proceeds can be invested in the business or placed in savings to earn interest. If the grain is stored, the amount of interest foregone is a cost of storage.
Don’t forget to include drying costs. Many producers dry farm-stored corn to about 13% moisture. The fuel and power required to remove excess moisture are storage costs. This process reduces the number of bushels and must factor into the equation.
When determining whether to sell grain straight from the field or store it in hopes of increased profits, farmers must consider all costs, ranging from fuel for drying down grain to crop shrinkage, and from elevator charges to interest.
To compute shrinkage for farm-stored corn, use a shrink factor of 1.25%, Wisner suggests. (Commercial elevators often use a shrink factor of 1.35% to 1.4%.) Multiply the extra points of moisture removed by the shrink factor and then by the current corn price. For example, the cost of removing two points of moisture for farm storage is 15¢ when corn is $6 (2 × 1.25% × $6 =15¢).
The cost of aerating dried grain in storage should be included, and is estimated at 0.2¢ to 0.3¢ per bushel under good management.
To help manage grain storage, many producers are turning to new integrated electronic-bin management systems. Karl Eshelman, who manages his family farm in Galveston, Ind., worked with OPI-integris to create a custom-built grain management system that helps him manage the nearly 373,000 bu. he stores after harvest. The system offers fully automated grain temperature and moisture monitoring, in addition to alarms, inventory monitoring and automated aeration.
For years, Eshelman Farms’ corn was coming in from the field with somewhere between 21% and 25% moisture and was dried using natural aeration. When corn came in too wet, they turned to their local elevator to dry it down.
Technology Benefits. The combination of grain elevator costs and the reduction in quality resulting from increased handling was eating into profits. With the custom-built IntegrisPro system, Eshelman knows for the first time exactly what is happening inside his bins, thanks to real-time PC-based computer monitoring. Now he has the confidence to hold grain for the right market opportunity.
In the short run, at a minimum, producers must cover variable costs. When considering those variable costs, don’t forget "opportunity cost," or the interest on inventory. On-farm grain storage is all about the bottom line, offering flexibility for producers and the opportunity to capture a basis increase from harvest until some point in the future.
- Mid-November 2012