With seemingly ever-increasing corn prices, many growers are rushing to construct on-farm storage facilities. But it's important to consider all costs — including those pesky hidden ones — before making such an investment decision, says Audrey Luke-Morgan of the University of Georgia Center for Agribusiness & Economic Development (CAED).
“In the short-run, you must cover your variable costs at a minimum. And when you're considering those variable costs, don't forget shrink and ‘opportunity cost,’ or the interest on inventory,” says Luke-Morgan.
Growers should consider the long-run implications, she adds. “Once you put in that capital investment, those are sunk costs, and they need to be recovered at some point. Finally, can you make money doing it? On average, the basis gained will be enough to cover variable costs and in some years, it will also cover fixed costs,” she says.
But there are even more factors to be considered, says Luke-Morgan. “Last year showed us that there are other factors to consider. And if Georgia is going to remain a grain state and continue to improve acreage, we have to look at the long-term picture and decide what we'll do to solve this situation. Last year, there were insufficient commercial storage facilities in the state, and there were complaints of transportation issues and bottlenecks during harvest,” she says.
If you control storage, then you make the decision when to market, she says, but there are management issues to consider.
“Make sure you get the information you need so that you can manage stored grain properly, and so that you'll have a high-quality product to sell,” says Luke-Morgan.
The Center for Agribusiness & Economic Development is currently involved in a project that looks at all facets of on-farm drying and storage in Georgia, she says. This includes an analysis of the current infrastructure and capacity, and the economic feasibility of new facilities in the state.
There are four main objectives in the study, she says. “First, we assess the current situation in Georgia related to the information available to dry, handle and store corn. Secondly, we're going to assess the ability to move corn to buyers in the region and how that can be done in an efficient manner. In this process, we're also completing an economic feasibility analysis of various corn drying and storage options, and from that we're going to develop a user-friendly decision aide that can be used to compare various alternatives for drying and storing corn in Georgia. This will be available through your county Extension agent, and it will allow you to look at individual situations on your farm,” she explains.
Economists at the center currently are doing a search and survey of current commercial grain facilities in Georgia. “We're also hoping to search and survey corn producers to see what is out there on the farm for storage and drying. Once this information is gathered and analyzed, we plan to map it geographically so we can determine the locations, the capacities, and how to better facilitate transportation throughout the state,” says Luke-Morgan.
It is expected the results of this survey will be completed by May 15, she says.
USDA currently estimates storage capacity in Georgia at 136 off-farm facilities in the state, she says. “But whenever I go to the Georgia Department of Agriculture list of bonded warehouses, there's no where near that many commercial warehouses listed. So we're trying to look at these discrepancies and see what is really out there.”
As of 2006, USDA said off-farm capacity was 43 million bushels and on-farm was 65 million bushels in Georgia, says Luke-Morgan. “We hope to determine how accurate those projections are.”
In conducting the feasibility analysis, the CAED has been working with engineers to try and determine what alternatives need to be considered.
“We're also trying to develop various plans of action that may be useful for different sizes, so growers can see what'll work best on their farm. We're looking at current costs — both capital and operating — from numerous businesses, and from that we'll be doing the cost-benefit analysis. Then, we'll be developing the user-friendly decision-aid tool. There was a preliminary version available last year, and we're refining and updating that tool so it is more user-friendly and reliable with current costs.”
On-farm grain storage is all about the bottom line, says Luke-Morgan, offering marketing flexibility for producers and the opportunity to capture that potential basis increase from harvest until some point in the future.
Historically, in south Georgia, that basis has been in the 35 to 40-cent per bushel range, she says.
Costs that need to be considered for on-farm storage include fixed costs, says Luke-Morgan. Among these are depreciation, interest on average investment, insurance, taxes and repair and maintenance.
Variable costs include operating costs, she says. “But with storing grain, you've also got to think about the shrink and your interest on inventory.”
As for the capital cost of putting in a grain bin, the current cost for a 10,000-bushel capacity is $32,525, says Luke-Morgan, or $3.25 per bushel for installing that infrastructure. A 20,000-bushel capacity bin is approximately $48,000 or $2.40 per bushel. This is a turnkey operation, including a concrete base, she says. A 30,000-bushel bin is estimated at $69,500 or $2.32 per bushel and a 40,000-bushel bin is approximately $88,500 or $2.21 per bushel.
These prices have increased since last year, she says.
“In our cost analysis with the decision-making tool, we're assuming a 20-year life per bin, shrink at 2 percent, in storage for four months, and an interest rate of 9 percent with a grain price of $4 — admittedly low for the grain price.”
As the grain bins become larger, the economies of scale become obvious, she says, with fixed costs running from 37 cents per bushel to 25 cents. “Then, we considered current variable costs, including electricity, labor, maintenance and repair, and insurance on inventory — these are traditional operating costs associated with storing grain. They range from 14.5 cents for 40,000 bushels to 16.4 cents for the 10,000 bushel-capacity bin. On top of that, we add shrink and interest on stored grain. The total variable costs range from 35 to 36 cents per bushel. That is equivalent to the historic basis in the state.”
The analysis leaves a total cost ranging from 60 cents up to 74 cents, says Luke-Morgan.