June 12, 2017
By Ross Albert
In times of low commodity prices and low margins, it can be difficult to imagine making major capital improvements. However, one capital improvement to consider for both landowners and tenants is grain drying and/or storage facilities. There four main areas of value to think about when determining if a grain system would be a good investment for a particular farm.
1. Capture more for stored grain. Grain bins can consistently return value to landowners and tenants by allowing them to capture basis appreciation and carry in the market. While futures markets are subject to speculation and outside factors, the cash grain markets are more of a function of fundamental supply and demand. If you think about basis as being a function to get grain to move, it helps explain why having storage can help you merchandise grain better.
It is very common to see the basis improve from the fall delivery time frame into the winter and summer months. In central Illinois, it is very common to see about a 15-cent basis appreciation from fall to winter delivery (January to March). Depending on the cash grain fundamentals, there is generally another 10 to 18 cents of premium (carry) from the December to March futures contract to capture as well. If the scenario allows for it, the carry could be even greater if the grain can be held into the summer months.
Every year is different, but I feel very confident that I can pick up an additional 30 to 40 cents per bushel with farm-stored corn. This also gives the owners of the grain the freedom to choose their delivery points based on the competitive bids. This can lead to an additional premium when the end user needs to compete for your grain. It is not uncommon to get a 5- to 10-cent premium (push) from a particular end user.
2. Save drying and storage dollars. Depending on the efficiency of the grain system, many on-farm grain facilities can dry and store grain cheaper than paying commercial rates. The savings will vary depending on the cost of the energy. This past season I was able to save 3 to 4 cents per bushel drying corn on the farm as compared to commercial rates.
Sourcing competitively priced propane and natural gas is very important to capturing any savings. The cost of the facility will need be to be factored in as well, but you are also saving the 15- to 20-cent minimum storage charge. These storage charges could be allocated toward paying for on-farm storage.
3. Gain overall efficiency. There is nothing more frustrating than having beautiful harvest conditions and nowhere to go with the grain. Closed elevators and long lines can be avoided with your own grain system. This can add both speed and efficiency to the operation while reducing harvest costs like trucking and labor. Also consider the possible advantages of being able to harvest the crop at ample moisture to maximize overall yield.
4. Raise overall farm value. If a particular farm has the ability to improve overall grain price and save on costs, that should have a positive effect on the overall value of the farm. If Farm A has a grain facility that allows the landowner to net a better return due to the facility where Farm B does not, Farm A will have a higher return on a crop share and higher cash rent, and will sell for a higher price. Determining the net value will be different for every farm. For example, if the grain facility would return 30 cents per bushel on a 200-bushel-per-acre farm, there would be an additional $60 per acre to be shared with the tenant and landowner, depending on the lease arrangement.
In summary, capital improvements are never free, but they should be considered to determine the bottom-line results. I would encourage both landowners and tenants to evaluate their current grain storage and drying process to determine if there is room for improvement. The net return on investment can be very attractive. For example, it is possible to build a new 60,000-bushel grain bin for around $78,000 ($1.30 per bushel). This would include electrical, concrete, fans and augers. I feel confident that there is, conservatively, 40 cents to be made on those on-farm stored bushels from basis appreciation, capturing carry in the market and saved storage costs. That’s a 30% return on investment annually. That investment is very attractive, especially in today’s agricultural environment.
Albert is a farm manager with Soy Capital Ag Services, Bloomington. He is a member of the Illinois Society of Professional Farm Managers and Rural Appraisers, whose members regularly contribute to this column. Have a farm management question or topic you’d like addressed? Email Carroll Merry at [email protected].
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