Let me ask what your grain marketing plan is for the 2013 crop. That’s what I thought. Storage. Keep it off the market until the market comes to you. And that is why you have kept the grain bin makers very busy lately.
Grain storage is the name of the marketing game and this is the type of year when it should pay, but the cost of storage should be a known factor. There is no reason to store grain hoping a springtime sale will cover the cost of storage and all of the associated expenses. But how do you determine the cost and how do you know if you have all of the expenses included in your calculation? Good questions!
The availability of storage provides an alternative to a marketing plan that allows one to capture the carry in the market. Sometimes the carry is small and a high cost of storage may not pay to forward contract. Iowa State University economists Bob Wisner and Don Hofstrand evaluate the cost of storing grain and make the point, “Maximum storage income results from selective rather than continuous use of storage facilities.”
Facility costs include depreciation, return on investment, maintenance, insurance, etc., which are not included in the operational costs for drying and handling, but must be included.
You paid a lot of money for a bin and all of the loading and unloading equipment and that must be amortized over the thousands of bushels that are stored and handled. And that cost exists whether the bin is empty or full.
If you have no farm storage and only use commercial storage, the facility cost is built into the few cents per bushel charged by the elevator. Those rates may be monthly, daily, or even start with a minimum charge.
You may not want to go to the trouble of calculating it, but there is an interest charge on the money that you have tied up in storing your asset. It may seem insignificant, but calculate it some time and you will realize that it is a significant cost that has to be covered by your break-even price that rises while the grain is stored. Consider the grain as collateral for a loan, and the longer you store it, the higher the interest charge is. Whether you are paying a commercial loan interest charge or losing interest for money that might be invested, interest is still a cost of storage.
Grain stored in a bin will only have value when it is unloaded if the quality has not deteriorated. The quality will not improve during storage, but it will deteriorate, and that will happen if it is too wet and its shelf life is shorter than the length of time it needs to be stored. Drying the grain is a cost either with on-farm storage or commercial storage and needs to be included in the break-even cost.
When grain is dried and moisture removed, the number of bushels in the bin will decline. The amount of shrink calculated by an elevator is slightly more than calculated for on-farm storage, but is a factor in determining the number of bushels eventually sold based on weight of the grain. The shrink for farm-stored grain is about 1.25 percent and for commercially stored grain is about 1.4 percent. For $5 corn, the cost of shrink for removing 5 points of moisture is calculated by: 5 points multiplied by 1.25 percent multiplied by $5.00, which 31.25 cents. That is over and above the drying cost.
Your farm bins will have fans that consume substantial amounts of electricity. However, you have tens of thousands of dollars worth of grain stored in the bin and the small amount spent on electricity is needed to ensure the grain does not decline in value because it came out as sample grade. The aeration is needed to cool the temperature of the grain in the winter and warm it up in the spring so the moisture stays in the same balance as the outside air. Aeration should cost under a penny a bushel and that is not much considering the value of the grain and keeping it condition.
Moving grain into a bin and moving it back out is an additional cost. Augers, conveyors, and elevators are put into bins to move grain. The initial investment is already part of the cost of storage, but the added cost of electricity and labor need to be added to the grain as part of the storage cost. Hofstrand and Wisner calculate that charge at 2-3 cents per bushel.
This is an issue that should not have to be addressed, but it will happen to the best of farmers when the environmental dynamics in the bin are not obvious. Problems may erupt from moisture, hot spots, insects, or even mold in the grain that was not detected. There are many pieces of technology available to monitor the grain quality and all elevators use them. Part of the cost of quality deterioration is shrinkage during the handling process and may not be known until the grain is sold. Such deterioration is part of the commercial grain storage charge at an elevator.
So how do you compute all of these costs and know what your break-even cost of storage may be? After all, if you have made the decision to store and not sell, the cost has to be known to know whether it is covered by the carry in the market.
Fortunately, another Iowa State University economist has developed a decision aid that covers all of the above costs and even more. William Edwards has produced a spread sheet that makes the calculations for you, when all of the known numbers are provided.
Those include grain prices, facility costs, electricity, interest, and all of the other items on the buffet of storage costs. Work through his decision aid and his graphs will give a good indication of whether your desired forward contract will make or lose money for you.
Storing grain is an important decision that has a cost, but a cost that can be calculated. And your calculation will indicate whether your marketing plan will make or lose money based on the storage decision. The cost of farm storage has many elements, all of which have different values for every farm. The cost of commercial storage covers those elements, but in a package deal offered by the elevator, and possibly with a minimum charge at the outset.
Your 2014 checklist for success:
- Get a soil test and recommendations from the Texas Soil and Plant Lab.
- Fill your planter with LG Seeds.
- Call Koehl Bros. and order a new bin, because you will need it!
Source: FarmGate blog