It s a change you just can t hide. More and more farmers all across Canada are choosing on-farm bins as their primary strategy for value adding.
At first glance, it seems an almost foolproof choice. You get the benefits of value adding without the costs of going into specialized crops, and without the risks of alternate markets. And that s exactly how it turns out on a majority of farms, where bins prove a successful strategy for generating extra income.
The farmers that COUNTRY GUIDE talked to in order to background this story report their on-farm grain storage and drying systems pay for themselves in three to five years, with minimal downside risks as long as the systems are well planned and you re able to pull off average to above-average yields.
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A potential surprise, however, can come from the fact that on-farm grain handling actually is more like other value-adding projects than it first seems. Like them, grain handling is a value-adding project that tends to influence farm decision-making at every turn, from how you plant, finance and market your crops to how you pass on your estate.
There are opportunity costs as well. Grain-drying systems in particular can eat the clock, not only during harvesting but also for monitoring, repairs, upgrades and even general thinking.
That s all time that you could be spending trying to turn an extra dollar somewhere else, so the cost analysis and the payback calculations for drying systems can be much more difficult than the computer programs at the dealership might suggest.
Nor is on-farm storage a universal choice. Manitoba farmer Jim Pallister for one is no big fan of on-farm storage. Although he s buying some hopper bins this year, it s more a reflection of a wet spring that forced him to seed everything in a two-week window, which in turn is making for a concentrated harvest.
My philosophy around grain storage is we re not in the business of storing grain, we re in the business of growing it and selling it, Pallister says. Over the years, I have never invested in granaries because our strategy was always to move the grain as quick as possible since the crops that we were growing were always quite in demand.
There s risk of storage of grade loss, to say nothing of the interest, Pallister says. And by having cash, we were always able to have relatively good liquidity over the years.
Pallister also sees changes at the Canadian Wheat Board as curbing bin expansion. The quota system is what held grain back onto the farms and forced people to deliver it over 12 months, Pallister says. Rather than get drawn into that and build a bunch of storage, we ve managed to expand steadily here and only buy a few hoppers.
Pallister believes that in the event the CWB loses its single desk as the Conservative government is planning on-farm storage expansion in Western Canada will be cut back significantly.
There can be a downside with cash flow too. It s not like an elevator where you go in today and say I m going to sell my 20,000 bushels and pick up a cheque tomorrow, says Mark Brock, who farms at Staffa, Ont. The only problem with on-farm storage from a marketing standpoint is it s not quick cash that you can get at an elevator if your crop s stored there. But I don t think that s a deterrent at all, I just think you have to be conscious of it.
Grain buyers are paying
There s a lot of bins gone up in the last five years in the area by guys who historically never really thought about it and took their crop to the elevator. Now, they re seeing some advantages to investing in their own facilities, Brock says.
Brock runs D&D Brock Farms, a livestock and cash crop operation with broiler breeders and a 1,500-acre rotation of corn, wheat and soybeans.
One of the reasons for the rising number of bins is grain company consolidation. In Brock s area too, Cargill has shut down a few sites, in no small part due to the creeping suburbs that are engulfing elevator locations, and the noise and dust complaints that often follow.
They re a little concerned about being good neighbours in the community, says Brock. For a while, there was a slowdown by the commercial elevators in their expansion and capitalization. So farmers themselves have been investing instead of these commercial elevators.
Elevator companies would rather have farmers doing the storing anyway, says Bob Devolder of Devolder Farms, a seed-processing and grain-handling and storage equipment business two hours west of Brock at Dover Centre.
You see more old elevators closing all the time, and that s because they see farmers building their own (storage), Devolder says. As these old elevators get past their time, where it might take some money to fix them up, a lot of them are just closing down.
The growing size of farm operations is also contributing to storage expansion, says Devolder.
All of the farmers who are bigger and expanding, they pretty much all believe in having their own storage, says Devolder. When they pick up more acres, they need to expand, even if they have existing dryer setups and storage.
Saskatoon s Bert Sutherland, a dealer for Sukup Manufacturing Co., which produces grain storage, drying and handling equipment, sees similar trends in Western Canada, where grain companies are paying farmers to do the storing for them.
Instead of them building the bins, the farmer is building the bins and they give him a little premium on the price, says Sutherland, who also heads up Bert Radio Online. They don t want the expense of the storage.
The other thing that enters into it is there s lots of farms being started up or purchased by corporations, adds Sutherland. They re looking for farms that are located in strategic locations for transport, with power and gas, and that have grain handling on them. They want to roll the trucks in, load them, and get them out. The goal is 15 minutes per truck.
There was a time when if a grain elevator point moved a million bushels of grain in a season, it was cause for celebration, Sutherland notes. Today, we have farms that store a million bushels of grain. That was almost unheard of, but there are farms like that.
Market advantages
One of the main benefits of on-farm grain storage is marketing flexibility, as farmers can hold on to their crops while they hunt for better prices.
I think it gives you way more options, agrees Devolder. If you deliver in the fall to a particular elevator, your options are really limited at that point. (With storage), you can shop around. You have way more flexibility on what you can do.
Typically, a farmer will make more money storing his crops because at harvest time, supplies are plentiful and buyers will have access to all the product they need. It s later in the year when grain is more scarce that they ll pony up.
Ethanol plants never shut down so they need it right up until September, October when the new crop comes off. So somebody has to hold it, and they usually pay you well for doing that, Devolder says.
Another advantage is you re not paying anyone to store your grain if you have your own facilities.
If you re storing at an elevator and the price of corn goes up five cents, you ve probably already got five cents into the storage, so you haven t made anything. Whereas if you re storing it on farm, and it goes up five cents, that comes back to you, says Alan Kelley of Kelley Grain Bins in Paris, Ont.
Some farmers with on-farm storage avoid dealing with elevators, selling their grain directly to end-users and picking up the handling fee.
The big companies don t want to deal with a lot of smaller ones, says Kelley, who sells grain bins but also farms. The one place where that works quite well is feed mills. There s a lot of farmers who store on farm that take their own directly to a feed mill and get a better price.
Harvest flexibility is a big plus that drying and storage offers farmers, adds Devolder. Farmers can set their own hours and aren t dependent on when the elevator is open. It certainly gives you a lot more freedom to control your own destiny, Devolder says.
Economics have also played a part in farmers undertaking their own drying. According to Kelley, his customers have told him their upfront costs end up being about half of what they would pay through the elevator.
Now, that doesn t cover their capital costs and labour, but there again, they re paying themselves.
A system can end up being paid back in three to five years, although it can be even less. Brock at one point made a $40,000 upgrade to an older system and estimated it paid for itself in about two years.
But that was because the way corn came off wet for two years and yields were good, so we had more volume to dry and I was drying for half the town, Brock says. Now I put a bigger system in since then and I looked at it as a pretty comfortable three-to five-year payback, no problem.
Brock adds that farmers looking into expansion and upgrading should be prepared to invest a good amount of time and management to look after whatever system they choose. Some are able to automate their operation to some degree. For instance, Brock uses his BlackBerry to access a web camera so that he can check out how his corn is progressing through the dryer while he s combining. He s also looking into operating the system remotely, where he can control it over the Internet.
I don t think we ll ever be able to start the dryer over the Internet, from a safety standpoint, but we ll be able to shut things down if we had to, Brock says. Down the road, if we put in different transfer systems, we could shut down one transfer system and start up another one.
Buy or lease?
Leasing has become very popular over the last 10 years or so, according to Sutherland, who says he leases most of his bins.
It can take 20 years to depreciate a bin under normal capitalization, but through leasing, the majority of it can be written off in three years, Sutherland explains. You do three years if you re looking for tax opportunity, use five years if you re looking for some cash flow, and if you want longer, finance it.
Leasing also allows more cash flexibility and the option to buy the equipment at the end, Sutherland adds. If you re looking for a piece of equipment and you go out and spend 100 grand on it, there s $100,000 cash out of your pocket. But if you lease it, you can put out $33,000 for the first year, $33,000 the next year, $33,000 the next year and then buy it for $10,000 or $20,000.
If a farmer does want to buy instead of lease, Sutherland strongly urges against being swayed by the lower prices of purchasing used bins at farm auctions.
I ve seen it done, not with much success, Sutherland says. You pay the labour to take it down and pay the labour to put it up, in addition to the cost of new bolts to rebuild the torn-down bins.
What will you pay?
Basic bins start in the range of $1.75 to $2.25 per bushel, including full-aeration floors, concrete foundations and unloading systems with power sweeps, but that can be a very misleading way to guesstimate the cost of a new system.
Equipped with a dryer, legs and complex augers, system costs can easily climb toward $10 per bushel, especially if you need to upgrade to three-phase electricity and bring natural gas to the site.
Contractors contacted by Country Guide say they install systems starting at $20,000 and topping out above $1 million.
The bigger the bin, the cheaper it is per bushel to build, says Alan Kelley. With the different types of dryers, there s such a variance whether it s in-bin or a tower dryer. There s a huge difference in the capacities. Obviously the bigger it is, the more money it s going to cost. To put any kind of an average on it, there s just too many variables.
As a rule, however, a 10,000-bushel bin will have a much lower per-bushel price than two 5,000-bushel bins, but some farmers may still prefer the latter, depending on their operation. And for the guy who only has 10,000 bushels of storage, a transport auger is all he needs to empty that bin and fill trucks and not do it that often, Kelley says. But someone else who s got a bigger setup needs to move the trucks through quicker, and you get into an overhead bin on a structure, so now you need a way to fill it and it s getting too high to just use an auger, so he s got to get into elevator legs and all this stuff… CG
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Simple paybacks as short as three years are driving bin expansions, but watch those opportunity costs
