Originally published in the September 30, 2019 edition of Agri-News
Knowing all the costs of grain storage is key in your grain marketing plan or asking the right price to rent out your bin.
During harvest, many producers are able to sell their grain directly off the combine for the right price. However, due to contract requirements, delivery or shipping opportunities, that may not be possible. Alternatively, some producers have excess bin space and see an opportunity to rent this space out to their neighbours.
“The most significant ownership costs of grain storage are depreciation, return on investment, repairs, taxes, and insurance (often called the DIRTI 5),” says Dean Dyck, business management specialist at the Alberta Ag-Info Centre. “Depreciation is the loss in value of the asset over its lifetime due to wear and tear and obsolescence. Typically, flat or hopper bottom bins depreciate at 4% per year over a 25 year lifetime.”
Return on investment is a calculation of the interest on money tied up in the storage facility. ”The rate of return on investment can be the rate at which money is borrowed. This is multiplied by one half of the original purchase price because over the life of the bin, its average value is only half of its purchase price.” Dyck adds repairs are needed to maintain the storage in reasonable condition. “As a guideline,” Dyck says, “use 1% of the purchase price for grain bins. Taxes and insurance can be estimated at 1% of the original purchase price.”
Using these calculations, says Dyck, producers can calculate the cost of owning their bins or determine the minimum amount to rent them out. “For example, flat bottom bins, with a lower purchase cost per bushel, generally rent between 1 and 1.5 cents per bushel per month, or 12 to 18 cents per bushel per year. More expensive hopper bottom bins generally rent between 1.5 and 2 cents per bushel per month, or 18 to 25 cents per bushel per year.” Dyck points out these suggested rates are guidelines only; producers should calculate their own rate based on cost of their own bins.
A study published by Alberta Agriculture and Forestry’s Economic and Competitiveness Division also calculated the cost of grain rings and grain bags. “Grain rings are the most economical solution for grain storage at 10 cents per bushel per year but are temporary solutions with a high risk of pest, wildlife and moisture damage and loss,” says Dyck. “Grain bagging systems have a high investment for the bagger and extractor, high spoilage and depreciation costs and low salvage values. The study estimated the cost at 53 cents per bushel per year.” Read the Grain Storage Considerations study.
Dyck says if you are holding grain in the bin for later sale, interest is a significant cost, adding the actual interest cost depends on the producer’s cash flow. “To calculate the monthly interest cost, a general guideline is to use your operating loan interest rate times the value of grain per tonne divided by 12. For example, if the cash price of #1 CWRS 13.5 is $221 per tonne and with a 5% operating loan, the interest cost of holding that grain equates to 92 cents per tonne per month.” Dyck says this cost can become significant if grain is held for a long period of time and can decrease your profit.
“Grain storage costs, the potential for price erosion, quality risks and balancing cash flow needs are all important components of a grain marketing strategy,” says Dyck. “Taking time to review your costs is a useful first step.”