Discovering the ROI of Grain Storage

Farm4Profit Podcast

If shiny new grain bins seem to be growing like corn in July on local farms, your eyes are not deceiving you. Numerous reasons exist for a farm operation to add grain storage to its holdings — reasons that affect long-term profitability. “But just like any other strategy, it’s a tool that can help diversify your risk. I’m not suggesting that farmers store all their grain, but maybe store a certain percentage of it, so that it aligns with your bias of the market and what your cash flow needs are.”

• advantages
• direct effect to the bottom line
• allowing you to run more of your operation on your terms
• gives you more control.

What are ways for farmers to store grain?

• Farmers have many options for storing their grain including on-farm storage or working with their local elevator.

Why Store Grain? -Advantages begin right at harvest.

• Avoid Historically Low Basis Levels
• As a function of local supply and demand, basis levels vary across geographies and conditions. Basis is simply the difference between the local cash price for your grain and the corresponding futures price on the Chicago Board of Trade (CBOT).
• Negative Basis
• Positive Basis
• Wide & Narrow Basis
• “Having on-farm storage gives producers a way to avoid wide basis levels driven by peak harvest supply,” says Steven Aldridge, Origination Manager for Bunge. “Typically basis strengthens post-harvest, and storage allows you to participate in that.”
• Crop Conditions/Quality
• crops can also suffer discounting because of other factors, such as quality factors, (e.g. moisture content, damage, or foreign material)
• One other aspect of storing grain that needs mentioning is grain quality. “You’re storing a perishable product that can be affected by temperature, moisture and pests,” he says. “Keeping the grain in storage without proper monitoring and maintenance could result in ruin. That’s why you need a plan for grain storage and know how marketing that grain aligns with your operation’s financial needs.”
• Improve Marketing Flexibility
• Controlling grain storage improves crop-marketing choices in several ways
• How far is the elevator or co-op from a processor or export terminal? That basis discount affects your crop and those of your neighbors’ equally.
• Storage gives you many more options than that. With grain safely in storage, an operation’s delivery radius extends dramatically. It allows producers to search for the best opportunity, rather than being forced to sell as-is to the most convenient local entity.
• The Futures Hedge
• On-farm grain storage opens up another important marketing tool that producers can use to manage risk as well as improve their profitability: the futures contract or hedge-to-arrive (HTA)
• Efficient Operations
• Time is money” could not ring truer than for farmers during harvest. Delays stemming from weather, transportation time or equipment availability translate to losses in the field or added costs.
• the local elevator may only accept grains during certain hours or force trucks to wait in queue, causing undesired down-time in the field.
• There is nothing worse than downtime during great harvest weather
• If you can haul to your own storage bins, they’re likely within close proximity, cutting down the number of trucks, drivers and fuel required. This keeps your combine running, making the most of prime harvest days.
• A delay in harvest could create opportunities for losses from frost, wildlife feeding, wind gusts, stalk deterioration, pests, and fungus all can whittle away at a standing crop.

ROI and Recouping Investment

Can I afford to build it? OR How can I afford not to?

• To get a good idea of the potential return on investment look at tracking the three- to five-year average on basis. That history can show you trends demonstrating basis-level changes on-farm storage can capitalize upon.
• Use the average in your area divided into the costs of your project to predict your return on investment
• Overall, four to five years as a typical expectation for an investment in additional storage to capture a return on your investment (ROI)
• The U.S. Department of Agriculture Farm Service Agency runs a program called the Farm Storage Facility Loan Program that typically amortizes the investment over seven years.
• Once we build the storage should we track the actual ROI?
• Why would knowing this be valuable?

Investment in Quality

• mechanical breakdowns create delays that can force harvesting in less-then-ideal conditions.
• Quality and reliable facilities reduce the risk for break downs and delays
• Commercial elevators have two moisture issues to consider when buying grain
• safety and quality: In a confined space, grain containing too much moisture heats up, potentially damaging the stored grain and also putting the elevator itself at risk
• To get grain to optimum conditions they may charge for shrink in addition to drying charges, and these discounts can quickly eat away at your profits.

Additional Comments?

• Without on-farm storage, this opportunity doesn’t exist for a producer
• Dealing with the unpredictability of nature lies at the heart of any farming operation. On-farm storage provides an additional tool that can create efficiencies, lower costs and improve revenue while contributing to better risk management and greater opportunity.”

What Does Success Look like to you?

Summary

Challenge