by Dean Dyck, AF
Farmers may be contemplating renting excess bin space to or from their neighbors, and Dean Dyck, farm business management specialist with the Ag-Info Centre says reviewing costs is a useful first step in the right direction: “Grain storage costs, the potential for price erosion, quality risks, and balancing cash flow needs are all important components of a grain marketing strategy that need to be considered.”
According to Dyck, the most significant ownership costs of grain storage are depreciation, return on investment, repairs, taxes, and insurance (often called the DIRTI 5). Depreciation is the loss in value of the asset over its lifetime due to wear and tear and obsolescence. “Typically,” says Dyck, “flat or hopper bottom bins depreciate at 4 percent 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” says Dyck. Repairs are needed to maintain the storage in reasonable condition. As a guideline, Dyck recommends using 1 percent of the purchase price for grain bins. Taxes and insurance can also be estimated at 1 percent of the original purchase price.
Using these calculations, producers can calculate the cost of owning their bins, or determine the minimum amount to rent them out. “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” says Dyck. Ultimately, however, these suggested rates are guidelines only; producers should calculate their own rate based on cost of their own bins.
The Grain Storage Considerations, study published by Alberta Agriculture and Forestry 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. “On the other hand, 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.
Finally, if you are holding grain in the bin for later sale, interest is a significant cost. 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 $216 per tonne and with a 5 percent operating loan, the interest cost of holding that grain equates to $0.90 per tonne per month. This cost can become significant if grain is held for a long period of time and can decrease your profit” says Dyck.