14 May 1999

Store investment best bet?

Good grain storage helps

growers to minimise

marketing risk and maximise

returns. With grain

production expected to

climb, should farmers build

more to cope, or are there

better alternatives?

Robert Harris reports

UK growers have invested more capital in on-farm storage than any of their counterparts around the world.

Historically, the reasons are clear. Over the past 15 years, the average return from storing grain in the UK between September and March has been worth £7.72/t, or 7.2% before management and capital costs, says Simon Ward of East Anglian consultants Bidwells.

During the same period, the average interest cost was 5.8%, producing a 1.4% return on storing grain.

Over the past four years, the picture has changed. Interest charges have continued at about the same level, just under 6%. But in 1994/95, grain values rose by just 4%, and only slightly more the following year, says Mr Ward. And in the past two seasons they fell sharply, recording an 8% loss between September 1996 and March 1997, and 11% in the same period last year.

But this pattern may change as grain volumes increase. Wheat yields are climbing 1-1.5% a year, says Mr Ward. Assuming that continues for the next 20 years, output will rise by almost a quarter. New technology could increase that greatly, he adds.

But it is policy makers, rather than plant breeders or chemists, who will have the greatest immediate impact, says Mr Ward. Agenda 2000 reforms and likely WTO-enforced support cuts will encourage northern European growers to replace much of their oilseed area with cereals, he predicts. "This could increase output by 1000-1500 tonnes on a typical 800ha farm currently growing wheat, barley, oilseed rape, beans and set-aside."

Whatever the cause, more output will add to price pressure at harvest, says Mr Ward. Short-term storage, therefore, is likely to increase in value. "But whether price rises during the season will cover the cost of long-term storage is doubtful. Agenda 2000 will move UK farmers closer to the world market where change and volatility and the influence of currencies will remain a feature," he warns.

Investing in purpose-built, new grain stores remains a luxury. For example, on-floor farm storage typically costs about £100/t, says Mr Ward. External bins cost about £20/t more, though this can vary depending on tonnage, he adds.

Assuming the floor store produces a typical return on capital invested over 20 years of 4.6%, even if money can be borrowed at 5% the business would lose £11,600 over that period. Double the interest rate and the cost rockets to £126,600. Where more expensive bins are used, a much lower return on capital of 2.1% can be expected. So at 5% interest, the business would lose almost £114,000, and almost twice that at 10%.

Costs can be cut. The examples above ignore the logistical benefits that resiting the grain store may bring, such as cutting haulage distances and times from the field, and reduced operating costs. On-floor stores can also be used to house machinery, fertiliser or livestock when empty, says Mr Ward.

New storage can also be created by extending existing storage. This may mean it can share existing infrastructure such as intake pits, elevators, conveyors, cleaners and driers, dramatically reducing the cost – £60-£70/t is quite possible, he says.

Buying or renting storage off the farm is similarly expensive for most grains, says Mr Ward. A typical charge of £50-£60/t in the first year plus annual charges of £7-£12/t are likely to produce a negative rate of return of about -3.6%.

But that can be made up by more sophisticated management, and returns can match farm stores if a premium of about £2/t is obtained, he adds.

Commercial stores are usually more costly. Charges are usually based on a handling charge of £2-£5/t a day, and a minimum storage period is often stipulated, he says. Drying charges can also be costly.

But off-farm stores may have a place for oilseeds, says Mr Ward. Rape is difficult to clean and dry in wet years, especially on blown floors, and it can add greatly to floor area.

There are several other, much cheaper, alternatives for cereals which could prove attractive given the uncertainties that lie ahead, says Mr Ward.

A joint venture with neighbours can create useful economies of scale. "This would be a natural progression for farmers already involved in joint machinery sharing."

General purpose farm buildings can be used for short term storage (up to one month). Provided they are enclosed on three sides, and are thoroughly cleaned, they will meet assurance scheme requirements. "They can also be modified to offer cheap, extended storage."

A semi-permanent building or tent enclosing a grain bunker will allow farmers to store grain until October or November, and should meet assurance scheme requirements.

Alternatively, growers could sell grain at harvest and use futures or options contracts to lock into unexpected post-harvest price rises, says Mr Ward.