On-farm storage – do the sums first
GroundCover™ Issue: 104 | 06 May 2013 | Author: ORM Communications
- Grain storage generally requires
more than one type of financial
benefit to be economic
- Preparing a grain storage strategy
can help determine the appropriate
storage type and management
- Considering the fixed, variable
and opportunity costs of storing
grain will help determine the best
use of capital
The economic viability of on-farm grain storage is a topic gaining significance as growers continue to expand their cropping enterprises.
“There are 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,” says Chris Warrick, consultant with ProAdvice Pty Ltd.
But do these examples provide enough evidence to suggest the need for more investment in on-farm grain storage?
When developing a grain-storage strategy, a simple cost-benefit analysis can be used to analyse the financial return of on-farm storage. The key is to identify which financial benefits the farm business is going to target, and cost an appropriate storage set-up to complement the business’s grain storage strategy and marketing plan.
Individual businesses need to determine whether on-farm grain storage is appropriate or not. A comparison should be made between the expected returns or benefits from on-farm grain storage and the expected returns from other farm business investments such as more land, a wider boomspray, a second truck or a chaser bin.
Mr Warrick suggests using a dollars-per-tonne basis to compare the benefits and cost in the same form.
One of the main financial benefits of on-farm grain storage is the potential to provide a return by storing grain to sell after harvest, creating a marketing advantage. Mr Warrick says storing grain can provide an opportunity to complement the business’s grain marketing plan and capture a seasonal price trend or sell into a specific local market that pays a premium for stored grain.
Research by Ag Concepts Unlimited reveals there are some commodities with seasonal trends that demand a premium for selling after harvest. For example, over the past 14 years on average the CME wheat futures price has peaked during September at a premium of 10 per cent above the December harvest price. This marketing advantage equates to $26 benefit based on $270/t at December (Figure 1).
However, if the harvest price for that year is above average then storage benefits are less likely. The benefit will vary from year to year and in some years may be negative.
“If targeting out-of-season premiums is a part of the grain marketing plan, the grain storage strategy needs to ensure it can maintain grain quality for an extended period,” Mr Warrick says. “An out-of-season delivery point is also essential in this case.
“For example, if grain is going to be held for several months to capture a market trend, insects need to be controlled. In addition, if phosphine or another fumigant is part of the insect-control strategy, then gas-tight sealable storage is required.”
Compare this with aiming for a local market such as a feedlot or dairy enterprise, and the question becomes ‘how long are we likely to need to store the grain and what is the premium for doing so?’
Improving harvest logistics or timeliness may provide another financial benefit for on-farm grain storage. “One example is the harvester being stopped because the trucks can’t keep up,” Mr Warrick says. “If this is the case, the on-farm grain storage needs to have the capacity for fast and efficient in-loading during harvest.”
Other financial benefits might include storing grain to:
- clean or blend, lifting the overall grade;
- put through a drying process so harvest can start earlier and finish later each day; and
- avoid paying peak freight rates during harvest.
“In many cases, growers should aim for more than one financial benefit to make on-farm grain storage pay,” Mr Warrick says. “For example, relying on seasonal market trends alone won’t cover the costs of storage in many cases, but when combined with the benefits of harvest timeliness and avoiding peak freight rates, it might be feasible.”
This is illustrated in Table 1, where two farms in different districts are both storing grain and selling out-of-season to gain a marketing advantage. However, in Farm B’s district there is also an additional freight benefit when carting out of season, which increases the overall return on investment.
The costs associated with grain storage can be allocated into two groups:
- fixed costs; and
- variable costs.
The fixed costs are those that do not vary from year to year or with varying tonnage, and are the same whether the storage is used or not. Fixed costs include depreciation and the opportunity cost of the capital or interest. There are variances in the fixed cost of different on-farm grain storage options, from about $5/t for bunkers to $15/t for segregated cone bottom silos.
The remaining grain storage costs are grouped as variable costs, and are those that vary by the amount of grain stored each year or by the length of time grain is stored. They include:
- labour time and fuel for in-loading and out-loading grain;
- labour time for cleaning storage;
- repairs and maintenance;
- grain drying costs;
- grain bags or bunker tarps;
- insect treatment cost;
- time for monitoring grain in storage;
- time to fix holes in tarps or grain bags; and
- opportunity costs of having grain in storage.
Mr Warrick says the cost of labour and time can be significant when a business considers what else it could be doing with that time. “As a minimum, a value should be put on labour time equal to what would have to be paid to someone to do the job.”
“For example, if a farm worker was paid $30 an hour, and it takes half an hour to line up and empty a 27t truck, the time cost to fill and empty the storage is $1.11 per tonne of grain.”
An example of an opportunity cost is the cost of having the physical grain in storage compared with having the money in the bank earning interest, or avoiding paying overdraft interest.
It is important to identify and highlight all the costs involved in grain storage, including the significance of the opportunity cost on capital and stored grain. “That is, the storage has to pay for the interest on the capital as well as the interest on the value of grain being held,” Mr Warrick says.
The addition of the fixed and variable costs can be used to determine what the cost of storage is relative to the planned financial benefits, leaving a margin for profit. They also help determine if there is likely to be a financial loss from storing grain on-farm. The margin ($/t) divided by the capital cost of the storage ($/t) multiplied by 100 is the percentage return on investment.
Mr Warrick provides an example: “If the planned financial benefits add up to $48/t and the fixed and variable costs add up to $33/t, the profit margin would be $15/t.”
“If the storage costs $133/t to set up in this example, then the return on investment is 12 per cent and it would be expected to take nine years to pay for itself.”
While it is difficult to put an exact dollar value on each of the potential benefits and costs, a calculated estimate will help determine if on-farm grain storage is worth a more thorough investigation. “If the investment in on-farm grain storage is compared with other farm investment opportunities, and the returns are similar, then the numbers can be revisited and their accuracy improved,” Mr Warrick says. “If the return is not even in the ballpark, then an expensive lesson has been avoided.”
To order your free copy of Grain storage facilities – Planning for efficiency and quality contact (free phone) 1800 11 00 44, firstname.lastname@example.org
The GRDC is developing a booklet to expand on the topic of on-farm grain storage viability. It will include a step-by-step guide to analysing the different options. The GRDC is also funding practical workshops around Australia on grain storage quality, management and economic viability. Upcoming workshop details can be found on the GRDC events web page. To organise a workshop in your area, contact project coordinator Chris Warrick, 0427 247 476.
GRDC Project Code PAD00001
Region National, South, North, West
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