The grain market this season is very different from previous seasons, with high selling prices, transport issues, labour shortages and changes in foreign markets impacting the industry.
As a grain farmer, you will be trying to develop a selling and marketing strategy in a very confusing market that will maximise your return per tonne. Some of you will be delivering against contracts agreed to during the season, and some will sell for cash at harvest time or delivery to a pool.
One of the options is to store your grain either with a bulk handlings provider like CBH or GrainCorp or to store grain on the farm so that you can take the opportunity to have access to possible higher pricing and cash flow after harvest.
On the surface, this strategy is straightforward; you are deciding to store the grain because you believe the market will rise and you will get a higher price per tonne.
However, it is very important that you make the decision based on all of the numbers (Income & Expenditure) and not just “feel”.
Simple calculation:
Tonnes stored x Target $/Tonne) - (Capital Cost +Variable Cost + Interest cost) = Return/Tonne
Before deciding to store grain, ask yourself two questions
1. Will it be more profitable?
Storing your grain exposes your business to higher market risk as the price for grain may drop when you need to sell.
There are many costs associated with holding grain. At a minimum, the price of your grain needs to go up more than your holding (storage) cost or you will lose money.
2. Can I afford to not sell in the short term?
This question assesses whether or not your business is able to survive without the cashflow from selling now.
Does your business have a big enough cashflow buffer to go without the income?
How long can you go without the cashflow before you are forced to sell?
Cost of grain storage
Before you decide to store the grain, you need to calculate the cost of storing grain. It’s important you calculate the cost of storing it on the farm and compare this to using a bulk handler to store it for you. The common costs of grain storage are:
1. Capital cost
- Capital purchase cost of silos
- Capital purchase cost of loading & unloading equipment
- Interest on purchase of capital
- Depreciation on capital
2. Variable cost
- Cleaning
- Maintenance
- Fumigation
- Aeration fan power & maintenance
- Spoilage (damage & spillage while handling & storing)
- Cost of bunked bangs (if using bunker bag storage)
- Load In & Load Out cost
- Your time to monitor & manage
- Labour time to monitor & manage
3. Costs associated with using bulk handlers warehousing
- Storage fees
- Load In & load uut fees
4. Opportunity Cost
The most significant and often forgotten cost of storing grain regardless of how you choose to store is the opportunity cost. When you choose to hold and store grain, you are choosing to delay this revenue and not pay down your overdraft. This means you will continue to pay interest on your overdraft until the grain is sold.
The simplest way to calculate this cost is:
(Current grain price) x (Interest rate of your overdraft) x (Number of months you store your grain)
For example:
How to work out if it is a profitable option
The best way to work out if storing grain is a profitable option and how to calculate the cost is to use a Grain Storage Cost Benefit Profit & Loss calculation. You can download a template from GRDC here.
If you decide it is a profitable option for your business, the next step is to update your Agrimaster cash flow forecast/budget and worksheet(s) to evaluate if it is a good cash flow option.
How to work out if it is feasible from a cashflow option
To forecast grain income, you need to have a 24-month cash flow forecast as any grain not sold in this production year will need to be forecast as cash flow in this production year. e.g.
- Our Farm Budget Feb 2020-Jan 2021 (Full Budget & Worksheet)
- Our Farm Budget Feb 2021-Jan 2022 (Full Budget & Worksheet)
Agrimaster Grain Worksheets
1. Open your Grain Worksheets.
2. Add all barley you plan to store as Non-pool in your production worksheet.
3. Fill in your worksheets to reflect your post storage marketing strategy.
a. Update your forecast cash sales in this production year (e.g. 2020 - 2021).
b. Update your Grain Stocks Sale A&L worksheet for all stored grain held over to the next production years (e.g. 2021 - 2020).
4. Add storage to your cost list (e.g. $25/Tonne) .
5. Add storage as in your operations worksheet linked to Non-Pool production - do not distribute the cost, as most of the cost of storing grain will not directly affect your cashflow.
6. Save.
7. Run a gross margin analysis.
8. Open your budget & review your cashflow.
Grain storage at harvest may be a good option for your business, but as you can see there are many factors that need to be considered.
First you need to calculate if it could be a more profitable option, then add it to your cashflow forecast to see if you can delay the revenue.
Even if it is more profitable on paper and you can manage without the cashflow you need to decide:
- If your business has the capacity to do the extra work required
- The likelyhood that the price of grain will increase whilst you store it
Grain storage is only one of many options in your grain marketing arsenal and every farm business needs to make a considered decision based on the unique requirements and capacity of their business.
If you are interested in going into detail on grain storage the GRDC have developed a comprehensive guide as part of Stored Grain Project.
To learn how to generate a Full Budget step by step, please follow the links below
This article is of a general nature and if you want a professional advice on grain marketing or grain storage strategy you can contact one of our partner consultants at the AAAC(WA).
