Cost Analysis Tool: On-Farm Drying & Storage

1. Cost Analysis Tool: On-Farm Drying & Storage Audrey Luke-Morgan University of Georgia Center for Agribusiness & Economic Development Corn Short Course Tifton, GA January 23, 2007 CR-07-03

2. What is the Center for Agribusiness & Economic Development (CAED)? • We are a unit of the College of Agricultural and Environmental Sciences, combining the missions of research and extension. • The Center for Agribusiness and Economic Development (CAED) has economists and business specialists with skills and knowledge to add value to Georgia's agricultural economy and help individuals succeed in agribusiness. • The Center provides timely assistance to producers and entrepreneurs in researching and implementing their ideas. Projects are reviewed and considered by their potential impacts.

3. What are the objectives of the Center for Agribusiness & Economic Development (CAED)? • The Center has three major objectives. • Our first objective is to provide feasibility and marketing services. • Secondly, we provide agricultural and demographic data for private and public decision makers. • Finally, we conduct analysis related to policy issues in Georgia agriculture and provide that information to relevant decision makers.

4. Levels of Feasibility Assessment • A feasibility study of an idea is conducted at three levels • Operational Feasibility • “Will it work?” • Technical Feasibility • “Can it be built?” • Economic Feasibility • “Will it make economic sense if it works and is built?” • “ Will it generate PROFITS?”

5. On-Site Storage & Drying A Cost Analysis Tool

6. Why Dry & Store on Farm? • Bottom Line- • Offers marketing flexibility for producers • Opportunity to capture potential basis increase from harvest time to some point in the future • Historical basis improvement for SWGA has been in the $0.35 to $0.40/per bushel range • Key Questions- • Consider all cost Factors involved. • Can you make any money doing it?

7. What Costs Are Considered? • Fixed Costs • Depreciation • Interest on Average Investment • Insurance • Taxes • R & M • Variable Costs • Operating Costs • Shrink • Interest on Inventory

8. Capital Outlay-Storage Assumptions used for cost analysis: Depreciable Life: 20 Years Interest Rate: 9% Shrink: 2% Grain Price: $4.00 Months in Storage: 4

9. Cost Analysis for On Farm Storage ***Estimates based on OSU Publication F-210. Analysis in Progress for Georgia.

12. On-Farm Drying

13. On-Farm Drying Cost Analysis *Dries 525 bu/hr at 5 points moisture per hr on 20 hr drying day or 335 bu/hr at 10 points moisture per hr on a 20 hr drying day.

14. Estimated Variable Cost to Dry Corn to 15.5% Moisture using Continuous Flow Dryer (Cents/Bu)

15. Commercial Drying Discount Rates

16. In Summary… • Must consider all costs when deciding whether to invest • In the short-run must cover variable costs at a minimum • Includes Shrink • Includes Opportunity Cost—Interest on Inventory • Consider long-run implications— “sunk” costs to be recovered • Can you make any money doing it? • On average, the basis gained will be enough to cover variable costs and some years will also cover fixed costs. • Are there other factors to be considered? • Insufficient Commercial Storage Facilities • Transportation issues/bottlenecks during harvest • Historical trends in prices—Post Harvest • Management Issues

17. “The increased return per bushel is measured in pennies. The risk of losing a bin of grain due to improper management can be measured in dollars.”

18. “Adding Value to Georgia’s Agricultural Economy through Research & Extension” Questions or Comments? Audrey Luke-MorganAgribusiness EconomistCenter for Agribusiness & Economic DevelopmentUGA Tifton Campus, RDCPO Box 1209Tifton, GA  31793-1209Phone: 229-391-6877Fax: 229-386-3440Email: audreylm@uga.eduwww.caed.uga.edu