STORING grain costs money! Farmers must be confident that the price received at sale covers storage costs and returns a profit.
The following example looks at a farmer who wishes to maximise marketing opportunities and store grain residue-free in a sealed silo. To do his, a new sealed silo must be purchased.
The cost of storing grain can be divided into actual costs and opportunity costs.
Storage costs depend heavily on the length of time that grain is stored.
Actual costs include the costs involved in providing storage services and operating costs.
- depreciation of the new asset over its perceived life as well as annual repairs and maintenance to the new silo
- the cost of handling equipment. If new handling equipment is also purchased, the depreciation for it must be included. In this example, however, we are assuming that handling equipment is already owned and used as part of the farming operation and therefore ownership costs such as depreciation and interest costs are ignored
- operating costs. These are directly related to the amount of grain handled and its time of storage. They include labour to load and unload silos, auger running costs, repairs and maintenance, insect control and quality loss, if any.
In this example, opportunity costs are twofold. Because the farmer paid cash for the silo, the first opportunity cost is the interest rate that could have been earned on putting the cash into an alternative investment.
The second and the main opportunity cost is the penalty for storing grain rather than selling it straight off the header at harvest. For the purposes of this example, it is assumed that a real interest rate of 12 per cent is the opportunity cost for purchasing the new silo and for holding grain in storage.
Changes in interest rates will of course influence decisions about the costs of storing grain. At high interest rates, the incentive to store grain is reduced unless there is a corresponding rise in commodity prices to offset the high interest cost.
For example, grain in storage valued at $140 per tonne could earn interest at the rate of 12 per cent per annum. The lost earning potential would add another $1.40 per tonne per month to the cost of storage. The longer grain is stored the greater the opportunity cost.
About the following example ...
The following example assumes that a farmer purchases a silo for cash that is on-hand and not borrowed. The figures used are only examples and will differ depending on grain prices and type, interest rates, type and price of silo and individual operating costs. However, the principles are the same for farmers doing sums for their own situations. Using a range of opportunity interest rates provides an indication of the variation in storage cost over time.
Assumptions used in the analysis:
- Silo cost is $5,700 for a new 80-tonne sealed silo.
- Silo life 30 years; salvage value 5 per cent of new value.
- The silo is filled to 80 tonnes once per year.
- On-farm grain price for wheat at harvest is $140 per tonne.
- Interest rate on long-term investment capital is 12 per cent real (i.e. net of inflation).
- Insecticide costs - phosphine fumigation: Effective only in a fully sealed gas-tight silo. Fumigate immediately the grain is placed in storage. Always treat the total volume of the storage regardless of how much grain is in the silo. The cost is 36 cents per tonne.
- Fuel, labour, repairs and maintenance approximately $3 per tonne.
A grower plans to store wheat and maximise marketing opportunities by storing the grain in a sealed silo. The grain is fumigated with phosphine immediately after it is placed in the silo.
Based upon the previous assumptions, the costs of storing grain are as follows:
1. Annual costs
TOTAL ANNUAL COSTS = CAPITAL COSTS + DEPRECIATION + VARIABLE COSTS
Annual costs include capital and operating costs. Capital costs incorporate the two main values of interest and depreciation.
(i) Capital costs
ACV (average capital value) = (cost installed - salvage value) ÷ 2
ACV (Silo) = ($5,700 - $285) ÷ 2
= $2,707 per year
Therefore, the annual interest (AI) for the silo is calculated at 12 per cent real on the ACV.
AI (Silo) = $2,707 x (12/1 00)
= $324 per year
= $4.05 per tonne per year
Silo depreciation is calculated using the straight-line method as follows:
New cost - salvage value depreciated over 30 years.
Purchase price = $5,700
Salvage value @ 5% of purchase price = $285
Depreciation over 30 years = $5,700 - $285
Depreciation per annum = $5,415 ÷ 30
Depreciation per tonne/year = $2.26 per tonne/year
(ii) Variable costs
Repairs, maintenance, labour & auger running costs = $3.00 per tonne
(iii) Insect control = 36 cents per tonne
TOTAL ANNUAL COST = $9.67 per tonne per year
2. Opportunity cost on grain stored
Interest forgone @ 12% real on grain @ $140 per tonne
= $16.80 per tonne per year
= $1.40 per tonne per month
3. Total grain storage cost per tonne for various storage periods
TOTAL GRAIN STORAGE COST PER TONNE = ANNUAL COSTS + OPPORTUNITY COSTS
BREAK-EVEN PRICE PER TONNE = PRICE PER TONNE AT HARVEST + TOTAL GRAIN STORAGE COSTS
|Storage period||Annual cost||Opportunity cost||Total||Break-even farmgate price|
This exercise can be repeated for different opportunity interest costs on the purchase of the silo and the storage of grain over various periods.
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