Farm & Ag Business Management Kelvin Leibold Farm & Ag Business Management Field Specialist ISU Hardin County Extension 524 Lawler Iowa Falls, IA 50126 (641) 648-4850 kleibold@iastate.edu www.extension.iastate.edu/

Costs and Returns from Grain Storage

90 million gallon corn ethanol plant Hog confinement facility with 3,300 head capacity with deep pit / full slats 90 million gallon corn ethanol plant

Golden Oval Eggs, Thompson, IA

Iowa Ethanol Production in Million Gallons

Iowa Corn used for ethanol - million bu.

62 Planned + current in Iowa 11 Just across the borders * S a c Linn Lee I d Tama Clay Kosuth J s p e r Lyon Page Story o n Fayette A i Benton W l P h t O f u b g B V k H w C G M Dickenson D Montgomery Iowa Corn Processing & Ethanol Plant Locations, Actual & Planned. 8/22/06 , Poweshiek Polk Boone Greene Carroll Crawford Plymouth ’ Brien Woodbury Monona Harrison Shelby Wright Franklin Floyd Chickasaw Webster Hardin Louisa Emmet Palo Alto Hancoc Worth Mitchell Howard Winnesh iek Allamakee Bremer Butler Hamilton Grundy Buchana Delawa re Dubuque Jackson Clinton Guthrie Dalla Johnson Marshal Pottawattamie Mills Fremont Madis on Warren Marion Mahask Keokuk Adams Union Clarke Lucas Monroe Taylor Ringgold Cherokee Calhoun Decatur Wayne Davis Henry Scott Humbol dt Clayton Cedar Sioux Cass Iowa * ** * * * * * * * * * * * * * * *

Source: Renewable Fuels Association

US Corn used in Ethanol Production – million bushels Today ≈ 2 billion bu.

Source: Dr. R Wisner

Source: Dr. R Wisner

Needed Yld. @ current Acres Source: Dr. R Wisner

Importers or Exporters ??? Yield Acres Location Time of year New Demand Old Buyers – rail Crop Mix – no longer 50/50 New Livestock – beef, dairy, pork Future of livestock

No man is an Island, entire of itself; every man is a piece of the Continent, John Donne(1572 - 1631), Meditation XVII

http://www.card.iastate.edu/ag_risk_tools/basis_maps

Source: Dr. R Wisner

Pre-harvest sales opportunities? If you pre-sell grain for fall delivery some of the storage issues disappear! Storage may allow you to capture premiums for grain in pre-harvest sales. How large will these premiums be in 3 years?

What is Carry? Carrying charges are the difference between futures delivery months (e.g. December and July)

CBOT Dec,July Corn Futures 1990-2006 Year Dec 10/15 July 10/15 Dec/Jul Carry 1990 2.28 2.47 0.19 1991 2.46 2.67 0.21 1992 2.10 2.29 1993 2.49 2.63 0.15 1994 2.18 2.41 0.23 1995 3.28 3.33 0.05 1996 2.87 3.01 0.14 1997 2.90 3.07 0.17 1998 2.27 2.50 1999 1.99 2.23 2000 2.07 2.32 0.25 2001 2.06 0.26 2002 2.54 2.66 0.12  2003 2.17 2.31 2004 0.24 2005 2.04 0.27 2006 3.17 3.34 0.16 Ave. 2.60 CBOT Dec,July Corn Futures 1990-2006 All were positive years

CBOT Nov, July Soybean Futures 1990-2006 Year Nov 10/15 July 10/15 Nov/Jul Carry 1990 6.14 6.60 0.46 1991 5.48 5.89 0.40 1992 5.35 5.64 0.29 1993 6.15 6.34 0.20 1994 5.39 5.74 0.35 1995 6.57 6.87 0.30 1996 6.93 6.86 (0.06) 1997 7.05 7.29 0.25 1998 5.56 5.90 0.34 1999 4.92 5.21 2000 4.65 5.01 0.36 2001 4.29 4.46 0.26 2002 5.52 0.04 2003 7.30 6.66 (0.64) 2004 5.14 2005 6.17 0.28 2006 6.31 0.42 Ave. 5.77 5.98 0.21 CBOT Nov, July Soybean Futures 1990-2006

Corn Dec 27, FC Delivery Month Bid Basis Op Mth Futures Delivery Date Oct/Nov 2006 2.97 -0.35 Z 3.325 2006-11-30 Dec 2006 3.03 -0.29 2006-12-31 Jan 2007 3.06 -0.38 H 3.445 2007-01-31 Mar 2007 3.11 -0.33 2007-03-31 May 2007 3.18 -0.34 K 3.52 2007-05-31 Jul 2007 3.23 N 3.575 2007-07-31 Oct 2008 2.96 -0.42 3.3825 2007-10-31

Corn VeraSun Energy Oct 27 Delivery Month Bid Basis Op Mth Futures Delivery Date Oct/Nov 2006 2.98 -0.35 Z 3.325 2006-11-30 Dec 2006 3.03 -0.30 2006-12-31 Jan 2007 3.07 -0.38 H 3.445 2007-01-31 Mar 2007 3.13 -0.32 2007-03-31 May 2007 3.19 -0.33 K 3.52 2007-05-31 Jul 2007 3.21 -0.37 N 3.575 2007-07-31 Oct 2008 2.88 -0.50 3.3825 2007-10-31

Difference in Basis VS FC Difference Oct/Nov 2006 -0.35 Dec 2006 -0.30 Jan 2007 -0.38 Mar 2007 -0.32 May 2007 -0.33 Jul 2007 -0.37 Oct 2008 -0.50 -0.35 -0.29 -0.38 -0.33 -0.34 -0.42 .00 .01 -.01 -.03 -.08

Webster County Basis www.card.iastate.edu Corn Soybeans

Cash VS FC Difference Oct/Nov 2006 2.98 Dec 2006 3.03 Jan 2007 3.07 Mar 2007 3.13 May 2007 3.19 Jul 2007 3.21 Oct 2008 2.88 2.97 3.03 3.06 3.11 3.18 3.23 2.96 .01 .00 .02 -.02 -.08

Off-farm Corn Storage Costs 8 months Extra shrink to 14% $0.04 Extra drying to 14% 0.04 Interest @ 8% 0.16 Handling 0.00 Storage 0.225 Total 0.465

Will storage pay? Will the carry improve more than normal? How is basis going to impact this? How much will storage cost? Who is building the storage now and who is going to build? What will they charge?

Off-farm Corn Storage Costs 8 months Extra shrink to 14% $0.04 Extra drying to 14% 0.04 Interest @ 8% 0.16 Handling 0.00 Storage 0.225 Total 0.465

Factors Encouraging More On-Farm Storage Specialty/Identity Preserved Crops Larger Trucks – Easier Grain Transport Harvest Time Bottleneck Concerns New demand and carry ????

The Cost of Storing Grain Adapted from materials developed by Daniel M. O’Brien Extension Agricultural Economist Northwest Kansas

What Storage Costs to Consider? Annual decisions to store grain are based only on covering VARIABLE storage costs and potential drying costs if a factor If VARIABLE costs of storage can be covered THEN grain should be stored Regardless of whether FIXED costs are covered Relevant to EXISTING Grain Storage Facilities Handling INTEREST Cost on Unsold Grain

When Should Fixed Storage Costs be Considered? Fixed Costs should be considered when deciding whether or not to actually build NEW GRAIN STORAGE facilities Before construction, ALL Grain Storage Facility costs are VARIABLE The cost NEW GRAIN STORAGE facilities should be compared to Commercial Storage Costs

Variable Farm Grain Storage Costs Study by Dhuyvetter, et al. KSU 2000 Conveyance: Cost of Tractor used on Auger Aeration: $0.01 /bu Insecticide: Bin wall spray, protectant, fumigant Interest Cost  (#  12 months) x (% interest) x (Harvest $) Shrinkage  [1% Shrink + (#months x 0.1%)] x (Harvest $)

Corn Variable Farm Storage $$ $3 Harvest Corn, 6 Months, Less Drying Bin A: 12500 bu Bin B: 25000 bu Bin C: 50000 bu Conveyance $0.002 Aeration $0.010 Insecticide $0.040 $0.020 Repairs (1.5% Investment) $0.024 $0.023 $0.019 Interest: $3/bu, 6 mo, 7.5% $0.115 Shrinkage: 1.6% shrink $0.048 Variable Cost / bu $0.24 $0.22 $0.20

Corn Variable Farm Storage $$ 3 Farm Bin Sizes, $2 /bu Corn @ Harvest

Corn Interest/Variable Storage $$ 25,000 bu Bin, $2 /bu @ Harvest

Fixed Farm Grain Storage Costs: Individual Bin Initial Fixed Investment 3 Grain Bin Investment Examples  12500 bu, 25000 bu, & 50000 bu capacities  20 year life Conveyance Equipment (Augers, etc)  $0.10 /bu storage, 20 year life Other Costs  $0.05 /bu storage

Fixed Farm Storage Costs Initial Investment in Individual Bins Bin A: 12500 bu Bin B: 25000 bu Bin C: 50000 bu Upfront Grain Bin Investment (20 yr life) $18,500 $25,000 $34,250 $42,500 $56,500 $62,500 Conveyance Equipment (20 yr life) $1,250 $3,425 $5,000 $13,000 Other Equipment (10 yr life) $625 $1,712 $2,500 Total Investment $20,375 $38,000 $64,000

Fixed Farm Grain Storage Costs: Annual Fixed Costs Bin Depreciation  Bin Investment  20 year useful bin life Interest Cost  Based on government subsidized loan rate & ½ the grain bin investment Taxes & Insurance  0.7% of Initial Investment

Fixed Farm Storage Costs Annual Fixed Cost for Individual Bins Bin A: 12500 bu Bin B: 25000 bu Bin C: 50000 bu Annual Grain Bin Depreciation (20 yr life) $0.084 $0.078 $0.067 Interest Cost (7.5%) $0.061 $0.057 $0.048 Taxes & Insurance (0.7% of Investment Cost) $0.011 $0.009 Annual Fixed Cost/bu $0.1560 $0.1460 $0.1240 Note: $60,000 expense with after tax loan 50% bracket = 6¢/ bu. pmt.

Corn Fixed & Total Storage $$ 3 Farm Bin Sizes, $2 /bu @ Harvest

Corn Commercial vs Farm Storage $2 /bu Corn @ Harvest, 25,000 bu Farm Bin Breakeven Farm TC & Commercial TC @ 8 1/2 mo (June) Breakeven Farm VC & Commercial TC @ 3 mo (January)

For NEW Grain Storage Facilities: All costs are VARIABLE before construction of bins/storage facilities TOTAL per unit cost (VARIABLE + FIXED) should be considered in the decision New ON-FARM STORAGE is generally MORE COSTLY than COMMERCIAL STORAGE for periods up to 8-9 months for the major commodities

The Six Challenges Harvest Cost or Storage Cost Drying Benefit “Carry in the market” + “Basis Improvement Incomes Taxes and Cost of $$$ Market Taker or Market Maker Other Choices – commercial, condo

Harvest Cost or Storage Cost Specialty / Identity Preserved Crops Larger Trucks – Easier Grain Transport Harvest Time Bottleneck Concerns Need to keep the combines rolling New demand and carry ????

Drying Bottleneck – create or solve Cost of drying- 4¢/pt.? Shrink factors – 1.4%? Moisture level 17% Blending capabilities Mechanics – location, access, capacity, design, electricity

Factors to consider Site location Drying needs Expansion options Cost of capital Tax issues

Carry and Basis Does historical data reflect the future? If basis would go positive would it impact the return for storage?

Difference in Basis VS FC Difference Oct/Nov 2006 -0.35 Dec 2006 -0.30 Jan 2007 -0.38 Mar 2007 -0.32 May 2007 -0.33 Jul 2007 -0.37 Oct 2008 -0.50 -0.35 -0.29 -0.38 -0.33 -0.34 -0.42 .00 .01 -.01 -.03 -.08

Cash VS FC Difference Oct/Nov 2006 2.98 Dec 2006 3.03 Jan 2007 3.07 Mar 2007 3.13 May 2007 3.19 Jul 2007 3.21 Oct 2008 2.88 2.97 3.03 3.06 3.11 3.18 3.23 2.96 .01 .00 .02 -.02 -.08

Market Taker or Market Maker Volume premiums - ¢¢ Quality Premiums- ¢¢ Utilizing labor and equipment – hired help and semis - ¢¢ Grain Trader – have semi will travel - ¢¢¢¢¢¢ Posted Price??? Owning paper versus owning commodity

Tax Issues Producer can Sec. 179 Grain bins are MACRS 7 year property Placed in service Grain bins are MACRS 7 year property 10% state, 15% FICA, 25% Fed If in the zero bracket it’s harder to pay for!

Cost of Money Higher priced grain means higher opportunity cost to store each bushel. You can still “seal grain” but the savings are not near the value it is with prices below loan rates. FSA does have a loan program for storage up to $100,000 at competitive rates.

Other Choices – commercial, condo Years to retirement Location Size of structures Safety TX, AZ, FL

Condo Storage Easy way to expand storage Can turn the storage several times a year Cost may be less than own storage construction costs May be easier to resell or transfer ownership Professionally managed

Condo Storage Annual maintenance fee – taxes, electricity Limits on tax credits Unknown life and salvage value Bottleneck – create or prevent May limit where you sell (basis, pricing tools, etc.) Review the fine print

Commercial Storage Has offered value in the past; will continue Professionally managed Going to build; not concrete Going to see interesting marriages?? Going to export corn unless USA becomes a major importer

Factors to consider Commercial vs. On-Farm Storage Costs Availability of commercial storage Market flexibility – several competitive markets Preserving grain identity Bottlenecks within the system – hauling distance, lines Transportation costs / savings Blending capabilities

Web sites to review http://www.agecon.ksu.edu/kdhuyvetter/Spreadsheets/On-farm%20storage.xls $$$$ http://www.ag.ndsu.nodak.edu/abeng/postharvest.htm http://www.bae.umn.edu/extens/postharvest/ http://www.abe.iastate.edu/fileadmin/www.abe.iastate.edu/research/wetcorn2.xls $$$$ http://www.farmdoc.uiuc.edu/fasttools/index.html $$$$$

C:\FILES\FILES\Storage costs2.xls

Web sites to review Drying cost calculator Cost of storing grain $$$$$ http://www.extension.iastate.edu/agdm/crops/xls/a1-20dryingcostcalculator.xls Cost of storing grain http://www.extension.iastate.edu/agdm/crops/xls/a2-33.xls http://www.farmdoc.uiuc.edu/fasttools/index.html $$$$$

Factors to consider Commercial vs. On-Farm Storage Costs Availability of commercial storage Market flexibility – several competitive markets Preserving grain identity Bottlenecks within the system – hauling distance, lines, dryers, logistics Transportation costs / savings Blending capabilities

Questions or Comments Run your own numbers

What should we be doing for you? 1. 2. 3. 4. 5. 6.