Grain storage – the economic considerations
Author: Chris Warrick (Consultant and National Coordinator for the GRDC Grain Storage Extension Project) | Date: 12 Feb 2019
Take home messages
- In majority of cases, on-farm storage requires multiple financial benefits to cover the costs.
- The most economic form of storage will be the one that suits your system, the grain being stored and the length of time it’s stored.
- Permanent on-farm storage is a 25+ year investment – it’s worth taking the time to do the numbers, consider the options and make informed decisions.
As growers continue to expand on-farm grain storage, the question of economic viability gains significance. There are many examples of growers investing in on-farm grain storage and paying for it in one or two years because they struck the market at the right time, but are these examples enough to justify greater expansion of on-farm grain storage?
The grain storage extension team conduct approximately 100 grower workshops every year Australia-wide and it’s evident that no two growers use on-farm storage in the exact same way. Like many economic comparisons in farming, the viability of grain storage is different for each grower. Depending on the business’s operating style, the location, the resources and the most limiting factor to increase profit – grain storage may or may not be the next best investment. For this reason, everyone needs to do a simple cost benefit analysis for their own operation.
Comparing on-farm grain storage
To make a sound financial decision, we need to compare the expected returns from grain storage versus expected returns from other farm business investments, such as more land, a chaser bin, a wider boomspray, a second truck or paying off debt. The other comparison is to determine if we can store grain on-farm cheaper than paying a bulk handler to store it for us.
Calculating the costs and benefits of on-farm storage will enable a return-on investment (ROI) figure, which can be compared with other investment choices and a total cost of storage to compare to the bulk handlers.
Most economic form of storage
The key to a useful cost–benefit analysis is identifying which financial benefits to plan for and costing an appropriate storage to suit that plan. People often ask, ‘what’s the cheapest form of storage?’ The answer is the ‘storage that suits the planned benefits.’ Short term storage for harvest logistics or freight advantages can be suited to grain bags or bunkers. If flexibility is required for longer term storage, gas-tight, sealable silos with aeration cooling allow quality control and insect control.
To compare the benefits and costs in the same form, work everything out on a basis of dollars per tonne. On the benefit side, majority of growers will require multiple financial gains for storing grain to make money out of it. These might include harvest logistics or timeliness, market premiums, freight savings or cleaning, blending, or drying grain to add value.
The costs of grain storage can be broken down into fixed and variable. The fixed costs are those that don’t change from year to year and have to be covered over the life of the storage. Examples are depreciation and the opportunity or interest cost on the capital. The variable costs are all those that vary with the amount of grain stored and the length of time it’s stored for. Interestingly, the costs of good hygiene, aeration cooling and monitoring are relatively low compared to the potential impact they can have on maintaining grain quality. One of the most significant variable costs, and one that is often overlooked is the opportunity cost of the stored grain. That is the cost of having grain in storage rather than having the money in the bank paying off an overdraft or term loan.
While it’s difficult to put an exact dollar value on each of the potential benefits and costs, a calculated estimate will determine if it’s worth more thorough investigation. If we compare the investment of on-farm grain storage to other investments and the result is similar, then we can revisit the numbers and work on increasing their accuracy and assessing the sensitivity. If the return is not even in the ball park, we’ve potentially avoided a costly mistake. On the contrary, if after checking our numbers the return is favourable, we can proceed with the investment confidently.
Unlike a machinery purchase, grain storage is a long-term investment that cannot be easily changed or sold. Based on what the grain storage extension team are seeing around Australia, the growers who are taking a planned approach to on-farm grain storage and doing it well are being rewarded for it. Grain buyers are seeking out growers who have a well-designed storage system that can deliver insect free, quality grain without delay.
For more information or advice on grain storage or to download a copy of the cost benefit analysis booklet and spreadsheet or contact the grain storage extension team click here.
0427 247 476
GRDC Project code: PRB00001
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