Post-Harvest Management: the Economics of Grain Transportation
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AEC-100 University of Kentucky College of Agriculture, Food and Environment Post-Harvest Management Cooperative Extension Service The Economics of Grain Transportation Jordan Shockley, Agricultural Economics hile transporting grain to the 35 market may be the last input cost 30 Corn inW the production of grain, it is a critical Soybeans decision a producer has to make, espe- 25 cially when margins are thin. Determin- 20 ing which market to sell your grain (if you have options) can be a complex decision. 15 Most producers in Western Kentucky Percent have multiple potential markets to deliver 10 their grain. This leads to the question 5 of, “Should I sell my grain to the closest elevator or should I transport it a further 0 distance to an elevator offering a higher JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC price?” What market you choose not only Figure 1. Average percent of grain marketed off-farm by month in Kentucky will determine the price you receive but Source: USDA National Agriculture Statistics Service 2005-2014 will also determine the cost associated with transportation. The market that How and When Is Grain Price and Discounts provides the highest price is not always the most profitable price. The tradeoff Grain Transported? One major component in determining between maximizing price per bushel In Kentucky, most producers trans- the most profitable marketing option is received from the buyer and minimizing port grain by way of a semi-truck with the grain price that is offered at the eleva- transportation costs could be the differ- either a double hopper or an open bed tor. Kentucky producers have the ability ence between making a profit that year trailer. Transporting with a semi-truck to lock in forward contracts with a par- or being in the red. allows for the greatest grain capacity ticular elevator for a set price or deliver Many factors will impact the trans- of approximately 1,000 bushels which grain on a cash plus/minus local basis. portation cost of grain and determine reduces the per bushel cost of transpor- In addition to the price variations at dif- the most profitable option. Those factors tation. Other transportation options ferent buyers, quality discount methods include grain price, distance, fuel price, in Kentucky include grain trucks with will vary. The primary quality discount wait time, quality discounts, labor, and either single or tandem axles that have for Kentucky grain producers is for truck capacity. It is common for most the ability to transport 300 bushels and grain moisture content. Three moisture producers to make their market decision 600 bushels of grain, respectively. Trans- discount methods are commonly used based on only one of these factors. How- porting grain to the market immediately by buyers in Kentucky: ever, all of these factors need to be consid- after harvest is not the only option for • A set $/bu discount per percentage ered simultaneously when determining Kentucky producers. Due to the in- point over the base requirement (e.g. the most profitable market option. This creased investment in on-farm storage discount schedule might say “$0.05 publication develops a framework to in Kentucky, producers have the ability to per bushel for each 0.5% over 15% determine the net price received per transport grain to market year-round and moisture”) load of grain from each potential market to potentially capture higher grain prices • A percent of weight or price per along with an example in the appendix. than selling at harvest. Figure 1 illustrates percentage point over the base (e.g. In addition, a Microsoft Excel–based the percentage of grain marketed off- discount schedule might say “Shrink to decision tool for comparing up to six farm by month in Kentucky. Most grain 15% at 2.5% per point) potential markets and determining the in Kentucky is held until January with • A shrink plus drying charge per most profitable option is presented. the intention of capturing higher prices percentage point over the base (e.g. or carry in the market and for accounting discount schedule might say “Shrink (tax) purposes. to 15% at 1.25% per point with a drying charge of $0.025 per bushel for each point above 15%.”) Cooperative Extension Service | Agriculture and Natural Resources | Family and Consumer Sciences | 4-H Youth Development | Community and Economic Development Grain price received, including an- be owned. The average annual economic Operating Costs ticipated discounts, plays a critical role depreciation can be calculated using the in deciding to which market to deliver formula in Equation 1. Fuel a load of grain. In addition to the price Interest. When purchasing a truck to Fuel costs for transporting a load of received, the transportation costs must transport grain, that capital also could grain depend on the fuel consumption also be considered to determine the most be used for alternative investments. This of the grain truck (miles per gallon) and profitable market for your grain. is also known as the opportunity cost of miles traveled to and from the buyer, as capital and is also a non-cash cost. The well as fuel price. Equation 3 will allow Grain Transportation Costs opportunity cost of capital represents the you to calculate the fuel cost for trans- expected return if the capital that was used Each potential market will have a porting a load of grain. to purchase a grain truck was invested in different transportation cost depending Equation 3 determines the fuel cost the next best alternative. Since the value of on a number of factors. Using the cost ($) for transporting a load of grain. To the grain truck is decreasing throughout calculations below, the total cost for own- determine the fuel cost per bushel for the time of ownership, an average value ing and operating a grain truck can be transporting a load of grain, divide the needs to be determined or a value at half- determined. Ownership and operating fuel cost by the number of bushels trans- way through ownership. This is calculated cost can then be compared to custom ported during that load, adjusted for the using the first formula inEquation 2. The haul rates in your area. base moisture content required by the interest portion of the ownership cost can buyer. This is referred to as dry grain then be calculated using the average value Ownership Costs bushels. To determine the number of dry from the first formula and an interest rate. grain bushels transported to market, use The ownership costs (a.k.a. fixed cost, The appropriate rate to use in determining Equation 4. overhead, indirect cost, or sunk cost) the interest portion of ownership costs associated with grain transportation are would be to use the expected rate on bor- Labor those costs that occur even if your grain rowed capital or the rate of return on the truck sits idle and is not in use. In other next best alternative investment. The labor cost for transporting a load words, the costs are incurred regardless of grain depends on the travel time to of annual usage. Ownership costs include Taxes, Insurance, and Housing and from the buyer, the wait and unload depreciation, interest, taxes, insurance, time at the buyer, and the wage rate for Taxes, insurance, and storage for a and storage. Depreciation and interest the driver. To determine the total travel grain truck represent a relatively small contribute to the bulk of ownership costs. time required to deliver a load of grain, portion of the ownership costs when Depreciation is a non-cash cost that the round trip miles traveled to the buyer, comparted to depreciation and interest. takes into consideration the value lost the average road speed (mph) during the In Kentucky, property tax is charged in a piece of machinery due to age, use, delivery, and the wait and unload time (in to all farm machinery. Also, insurance and/or becoming obsolete. Economic hours) are required. The total travel time for a grain truck is required for liability depreciation, discussed here, is not the is calculated using Equation 5. coverage, collision, and property damage same as tax depreciation. The average Use Equation 6 to determine total since it is an on-road vehicle. In addition, annual economic depreciation can be labor cost in dollars for delivering a load storing a grain truck comes at a cost. calculated using a straight-line depre- of grain. Multiply the wage rate ($/hr) by Even if a grain truck is not stored, a cost ciation method. To determine economic the total travel time calculated in Equa- is associated with a decrease in value depreciation, the purchase price of the tion 5. based on keeping the grain truck outside truck, the salvage value, and the owner- Similar to fuel cost, to determine the (weather wear and tear). The annual ship life are required. The salvage value labor cost per bushel of grain, divide the ownership cost for taxes, insurance, and is what the truck would sell for after the labor cost by the number of dry grain storing is about 1%-1.5% of the average ownership life is reached. The ownership bushels transported during that load. life is the number of years the truck will value determined above. Equation 1. Depreciation Equation 2. Interest Purchase Price - Salvage Value Purchase Price + Salvage Value Depreciation = Average Value = Ownership Life 2 Interest = Average Value x Interest Rate Example: If a grain truck has a purchase price of $50,000, a salvage value of $10,000 and an estimated ownership life of Example: 8 years, then the estimated annual economic depreciation Using the same grain truck in the depreciation would be: ($50,000-$10,000)/8 = $5,000.