Farm Progress

Use these guidelines to: Calculate rental rates for grain bins

June 29, 2007

3 Min Read

With the significant acreage shifts that have taken place in the Mid-South, grain storage will be in high demand this fall. On-farm grain storage will be no exception.

Producers or landowners with grain bins may find it relatively easy to rent any excess storage available. In this article I'll provide some guidelines for determining a rental rate for grain bins.

Estimating a rental rate for on-farm grain storage can be based on one of the following: ownership costs and commercial storage rates.

Ownership costs

Common ownership costs include: depreciation, interest, repairs, and taxes and insurance.

Depreciation is an annual, noncash expense which recognizes the amount of value the grain bins lose each year due to use, age, and obsolescence. It is also a way of spreading the cost of the grain bin over its expected useful life.

Table 1 shows the expected useful life of grain bins and associated drying equipment. The annual depreciation (as a percent) of a grain bin with an expected useful life of 20 years is 5 percent (100 percent divided by 20 years equals 5 percent per year).

For example, a $100,000 grain bin would have annual depreciation of $5,000 (5 percent × $100,000 = $5,000).

The interest rate on intermediate term loans or the rate of return from other fixed investments can be used to estimate the interest costs on a grain storage facility. Interest costs are calculated by multiplying an annual interest rate by the average value of the grain bin over its expected useful life.

Interest cost can be calculated as follows:

Average Value = Cost + Salvage Value/2

Interest = average value × interest rate.

For example, annual interest costs are $3,000 for a $100,000 grain bin. This is figured by multiplying one-half of the original investment ($50,000) by an interest rate of 6 percent. The salvage value was assumed to be zero (0) in this example.

As shown in Table 1, estimate annual repair costs using a rate of 1 to 2 percent of the original purchase price of the grain bin. For drying and handling equipment, use 3 to 5 percent of the original purchase price.

Taxes can be figured by multiplying the local property tax rate times the assessed building value.

If that is not available, a general guideline is to use 1 percent of the original purchase price.

Insurance costs can be obtained from the insurance policy or use 0.5 percent of the original purchase price.

An example of estimating the annual ownership costs of a grain storage facility is shown in Table 2.

Commercial rates

On-farm storage rates can be based on commercial rates minus an appropriate discount. Elevator storage includes handling and managing the grain, and bearing the risk of storage losses. A suggested rental charge for on-farm grain storage is two-thirds to three-fourths of the local rate for commercial storage.

For example, assume the local commercial storage rate consists of an initial charge of 10 cents per bushel for the first three months of storage and an additional charge of 2 cents per bushel for each additional month. This amounts to a six-month commercial rate of 16 cents (10 + (2 × 3) = 16). The on-farm storage rate is estimated to be 12 cents (16 × .75 = 12).

For assistance with grain storage questions, contact your local county extension office or me at (870) 972-2481.

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