We’ve noticed a common theme underlying recent calls from our clients. Many are looking for advice about adding grain or fertilizer storage.
The future is full of uncertainty. Will the crop yield as expected? Will the commodity prices shrink and drag fertilizer with them? What will the fertilizer market do in the next 12 months? How secure is your rented land base?
Tell us the answers to these questions and the answer becomes crystal clear. But without that, storage decisions are a balance between commodity or input price risk and long-term financial viability.
Consider an aggressive young farmer named Serge Forwerd. Forwerd has been farming cereals and oilseeds for seven years; he’s leveraged profits and cash to grow his farm quickly and aggressively.
Forwerd rents a high proportion of his land base. He’s operated profitably in the past, but is growing tired of his annual storage challenges. He runs older combines and has found that maintaining older harvest equipment and constantly shuffling grain inventory is stretching him thin at harvest time. He has identified that for his current land base, he is approximately 80,000 bushels short on storage space.
Considering his short-term challenges, it would seem like an easy decision for Forwerd to add the required storage. However, with his aggressive growth, he’s positioned at only 56 per cent equity, with fixed charges that are 180 per cent of the area land rent.
He realizes that the rent he is currently paying on land is significantly less than the recent coffee shop talk, and although his relationship with his landlords is very good, he’s concerned about adding grain storage today for land that may not be in his operation tomorrow. In addition to rendering this grain storage useless, the loss of rented land would increase the fixed charge carrying cost per acre of his existing farm, further threatening longer term viability.
We identified the following options for him to consider before he surges onward.
1. Timely marketing.Proactively market commodities at target price levels to ensure early movement at profitable pricing. This required movement of commodities into the system at a time when basis levels may not be favourable may force the farm manager to sell at a lower price than what otherwise may be obtained.
2. Grain bags. Temporary, disposable grain bags can offer good quality storage with short-term minimal cost. However, they don’t solve the storage issue in the long run, and they are more labour intensive to load and unload. If you are in an area prone to wildlife damage, there may be additional storage risk as well
3. Build more steel flat bottom bins. Larger steel flat bottom bins can offer a cost advantage but require a significant outlay of capital or the implications of long term payments. They are not easily sold should cash be needed or rented land lost. These bins offer the option of aeration and better storage of tough grain.
4. Build hoppers. Hopper bins carry a premium price with initial investment which could be offset by less depreciation than with flat bottom bins. The aeration gives the farmer the option to harvest tougher grain. The impact that hoppers have on long-term payments and leverage is even greater than the steel flat bottom bins.
5. Grain rings. Grain rings offer significant storage with very little investment compared to bins. However, the option of aeration is eliminated and the risk of spoilage is greater. They also represent more work to unload and clean up.
6. Pile in the field. With favourable weather conditions, this option may work, although risk of spoilage is higher and unloading and clean up is far more labour intensive.
The decision to add grain storage is a difficult one on highly leveraged farms. Adding storage may increase the price achieved for commodities, but it doesn’t matter if the long-term risk from additional payments proves to be too great.
The second situation we wanted to highlight was Norman Nutrients, a grain farmer that is always on the hunt for a good deal on fertilizer. He has operated at approximately 85 per cent equity, and cash doesn’t limit his ability to make short-term business decisions.
Nutrients normally pre-buys his fertilizer, but he doesn’t have enough storage for all of his urea and phosphate requirements. He was satisfied with the price he paid last summer for nitrogen but when compared to the price he can secure now, he can save approximately $100 per mT. The cost of adding quality, hopper fertilizer storage is not far from that $100/mT and as such the decision to add additional storage to take advantage of a good nitrogen price seems to make sense. This is based on the assumption that the cost of production and commodity margins are similar to exactly one year ago, a speculation that may or may not prove to be true by October. †