UW Extension tools help producers analyze costs, rewards of on-farm storage
For some farming operations, building on-farm grain storage facilities could be more economical than immediately hauling grain to town at harvest, and to help make that decision UW Extension Farm/Ranch Management Specialist John Hewlett has put together some tools to analyze grain bin economics.
“There are two categories of costs to think about as far as owning a grain bin on-farm,” says Hewlett. “It’s not unlike owning or operating machinery or the other buildings we might invest in for our farm or ranch business. There are ownership, or fixed, costs and there are operating costs, or variable costs.”
He explains ownership costs remain constant over whatever level of activity might take place on the farm. “They don’t change with the level of business activity,” he explains.
Variable costs change with the level of business activity, such as fuel and labor use.
“The more business you do, the mose expense you incur,” he says. “Those two types of cost make up the total cost for an operation.”
Fixed costs involved in grain bin ownership and operation include taxes, insurance, depreciation – or the charge assigned to allocate its initial cost of its useful life, which is not the same as tax depreciation. Hewlett says fixed costs also include long-term interest on borrowed capital.
“Even if you didn’t borrow, but invest your own capital to buy the bin and put it in place, you should think of a return on your own investment,” he says. “One way or another you should assign a cost for the use of the capital investment.”
Variable costs involved with grain bin ownership include the operating costs of fuel, lube, repair and maintenance.
“If you have them, the dryer and elevator will cost a little for electricity, as well as additional fuel – a cost that will increase substantially with a dryer,” says Hewlett. “Any repair and maintenance to keep the bin functional would also need to be accounted for – whether it be parts or having someone come out and work on it.”
Hewlett says those costs for depreciation, interest, taxes, insurance and repairs should be assigned over the lifetime of the bin, which he says is typically 15 to 25 years.
As far as what bins are selling for, Hewlett says that, according to a current price list, a 15,000-bushel bin costs almost $26,000, and can rise as high as $62,000 at the top end.
“That’s just the initial purchase cost – not all the other costs that also need to be accounted for,” he reminds.
That’s when the tool he’s put together – the Grain Storage Purchase Analysis – comes in handy. It can be found online at farmmanagement.org.
“It allows you to categorize expenses, put in your own values and evaluate the decision,” he says.
For a 25,000-bushel bin costing $33,000 for initial purchase and construction, a producer can enter added costs for site preparation, including additional electricity, leveling, putting down a pad and any other factors to give a bin cost total.
Then the tool asks for capacity, allowing a user to play around with IRS tax depreciation components to see the differences they make in cash flow.
“Then you can put in information about financing – a down payment of 25 percent and a loan of 10 years at 7.5 percent, for example. You can put any values in to come up with your individual financing charges,” explains Hewlett.
The tool also has the opportunity to enter other overhead costs, like repair and maintenance, a change in taxes – like an increase in property taxes, insurance on the bins and equipment.
“Those entries give an estimate of annual costs,” says Hewlett. “The actual cash flow is shown in a table where they’ve calculated for each year of the 20-year horizon all the changes you’ve put in, including the loan for 10 years paid off with principal and interest. It has any tax implications, and a total cash outflow for years one through 20, which it standardizes, working back on an annual basis.”
Hewlett says the end table not only shows costs in terms of total dollars of expense for the year, but also accounts for all the cost categories on a cash and per-bushel basis.
Following that analysis, with another tool a producer can see how building his own bin compares to commercial storage.
“There’s another tab at the bottom of the web page called ‘Comparison,’ and there a producer can put in the differences from the owned bin situation versus what they’d pay for commercial storage,” says Hewlett. “It starts off with drying costs and accounts for any restrictions on commercial storage, like a minimum storage.”
The comparison also allows for any additional utility costs for on-farm storage, and shrink in terms of moisture loss while the grain is in storage, as well as another shrink in handling costs.
“It accounts for both moisture and handling shrink on commercial as well as owned storage, and for transportation costs to take it out of your bin and deliver it to the terminal, or deliver it to the terminal directly from the field,” explains Hewlett.
The comparison also includes a change in quality, as grain delivered later on a dry basis may possibly earn a premium.
“After putting in all those factors, a comparison between commercial and owned storage is broken out. The drying costs, shrink, storage, transportation and quality categories are compared,” says Hewlett.
“In the example I ran, the benefit of on-farm storage is about $1,500 to the better for owned storage,” he says. “Looking into the comparison at the shrink costs, we were a little worse off having our own storage by $459. It all hinges entirely on the values you put in, and it accounts for those things on an annual basis.”
“Every single assumption could change the net benefit number,” he continues. “For my example numbers, which accounted for all factors including all capital involved in the project, as well as tax implications, the net benefit was $1,336.”
In addition to a set of bulletins that would help evaluate the decision of on-farm storage, Hewlett has also provided a tool to help crop producers understand what differences some of the dollars and cents can make.