Estimating crop storage costs and post-harvest marketingEstimating crop storage costs and post-harvest marketing
Tough Decisions: It doesn’t always make economic sense to store grain for later as a marketing strategy – here are a few tips for analyzing the costs and benefits of storing grain for later sale.
July 26, 2018
By Robert Tigner
Many farmers own grain bins, which can have several benefits. Drying and storing grain, preserving identity, and speeding harvest are among these. One of the more important reasons many farmers utilize grain bins is to store grain for later sale at higher prices.
However, just because grain bins are available, it doesn’t mean it makes economic sense to store grain for later sale — for example, when the costs of storage are greater than the price increase.
That’s why it’s important to correctly analyze the cost and benefit of grain storage as a crop marketing strategy.
Fixed and variable costs
The costs of storing grain falls into two categories — fixed and variable:
• Fixed costs. First are the fixed costs of owning grain bins. These are often referred to as the “DIRTI 5” — depreciation, interest, repairs, taxes and insurance. During the decision-making process for building grain bins, fixed costs are considered but do not impact the storage decision after the bins are built.
• Variable costs. The variable costs become important in making the decision to store grain. These variable costs include interest, extra drying expense, grain shrinkage, labor and management, and quality deterioration. These variable costs become the ones that must be considered and recaptured when selling stored grain after harvest; otherwise, the decision to store will lose money.
Drying corn beyond the 15% moisture standard to 13% for long-term storage, costs in two ways, but is necessary to store grain past the spring following harvest so that grain is kept in good condition for sale. One estimate is that each point of moisture costs 3 cents with propane (at $2 per gallon). Therefore, decreasing moisture 2 percentage points would cost 6 cents per bushel.
Shrink also occurs when drying lower than 15% and leads to fewer bushels to sell. Shrink is approximately 1.15% per point of moisture below 15% moisture. So, at 13% moisture, there would be 2.3% less corn to sell costing 7.6 cents per bushel for $3.30 per bushel corn.
Corn sold before late spring is unlikely to suffer quality deterioration, but this could occur if held into summer without this additional drying. Managing the stored corn will require additional labor that is estimated at 4.5 cents per bushel for six months.
Another variable cost is opportunity cost. Grain held for sale could have been used to pay off an operating note or invest in something earning interest. Assuming a 6% interest rate for six months, that opportunity cost for $3.30-per-bushel corn would be 9.9 cents per bushel.
Calculating a monthly variable storage cost, we estimate 2.4 cents per bushel if stored for a short period. However, you must add 13.6 cents per bushel to the variable costs for corn held for sale after six to eight months following harvest, due to the extra drying cost and shrink. So, if a farmer stored corn for nine months after harvest for sale in July, the monthly cost per bushel for storage would total 35.2 cents, just over 3.9 cents per month. Table 1 below summarizes the costs discussed.
Table 1: Storage Costs Example
Account for carrying charge
We can now use this information to figure out if we want to store grain past harvest and for how long. First, we need to understand carrying charge. Carrying charge is the price difference between futures contract months. If we compare the difference in price between months, then we can calculate how much the market will pay to store for that length of time.
In the example in Table 2, the market will pay us 12 cents to store from December to March for three months, at an average of 4 cents per month. Since the cost to store for that short period is only 2.4 cents per month, farmers are likely price grain for delivery in March and store it on farm until then.
Table 2: Corn Carrying Example
If we compare storing corn from December to July, 7 months, the price difference between futures contracts is 26 cents, or 3.7 cents per month. This price difference is less than the long-term storage cost estimated at 3.9 cents per bushel per month. Holding grain in storage under these conditions would be a loss in revenue for the farmer.
Understanding the storage cost of grain and the carrying charge offered in the market is an important factor in making decisions that affect the net income of grain producers. The storage decision is one where farmers can increase their income or reduce it. Make the decision based on facts and calculations and not on emotion.
Tigner is a Nebraska Extension educator of ag economics.
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