By Kari Burnett, PAg, Regional Farm Business Management Specialist, Ministry of Agriculture, Swift Current
August 9, 2016
As marketing strategies change, the need for farmers to have adequate (and usually increased) on-farm grain storage has become more essential. However, on-farm grain storage does have a cost attached to it, regardless of the type of storage being used. The capital cost of a typical steel bin can range from $2.50 to $4.50 per bushel depending on the size of the unit, type of floor and any attached equipment such as aeration. To calculate the cost of storage we must consider the depreciation, investment cost, insurance and repairs.
The depreciation cost reflects the loss in value of the asset as it ages. It can be calculated by taking the original cost minus any expected salvage value and dividing by the expected lifespan of the bin.
Depreciation = (Original cost – salvage value) / Expected lifespan in years
E.g. ($20,000 - $8,000) = $400
The investment cost reflects the cost of having capital tied up in the steel bin and therefore not earning interest. It is calculated by taking the average investment cost times a reasonable interest rate.
Investment cost = (Original cost + Salvage value) /2 x Interest rate
E.g. ($20,000 + $8,000) x 3.3% = $462
Insurance and repair costs reflect actual expenditures. Repairs are often estimated as a percentage of the original cost. In the case of steel bins this percentage is low – about one half of one percent.
E.g. Annual insurance premium = $60
E.g. Annual repair cost ($20,000 x 0.05%) = $100
Adding all these costs together will give you a total annual cost that can be divided by the bushel capacity to obtain a cost per bushel.
Total annual cost = $1,022
These calculations are also useful for estimating rental rates for grain storage. In most cases grain bins are only filled once per year, so the full yearly cost is charged to those bushels. Multiply the bushel rate times the bin capacity. If a bin is generally filled more than once, it would drop the per bushel cost of storage. In addition, the full yearly cost for the bin is typically charged regardless of how full the bin is because the cost is the same whether it is full or half full.
Other forms of storage will have different costs attached but can be calculated in a similar fashion. Grain storage bags for instance have a one-time use and so the full capital cost is charged to that year. The cost associated with equipment needed to fill and empty the bags is also a consideration although any type of storage will require some equipment. Grain bags are also subject to a greater risk of grain loss due to factors such as wildlife damage. Temporary storage of grain in piles on the ground also has a cost as a result of the loss due to spoilage. Farmers have developed many strategies to reduce this loss but some is inevitable.
Formulas to calculate these costs and additional information is available in the 2016-17 Farm Machinery Custom and Rental Rate Guide, which is available online and at any Saskatchewan Agriculture Regional office. For more information, contact your local Regional Farm Business Management Specialist or call the Agriculture Knowledge Centre at 1-866-457-2377.