The Economics of On-Farm Storage Kansas State University Agricultural Experiment Station and Cooperative Extension Service The interest in grain storage in Kansas and those years. Total production of these four crops other states has escalated recently. This interest exceeded storage capacity in the late 990s, which can be attributed to increased yields due to put pressure on the state’s ability to store grain improved technology and genetics, wide basis and led to the increase in storage capacity in 2000. levels at harvest, and a shift to more corn acres However, since 2000, production levels have been due to the growing number of ethanol plants below the peak levels of the late 990s and the being constructed. More specifically, corn gener- storage pressure that existed at that time generally ally has higher yields than other competing grain has not prevailed in the state, at least on average crops, requiring more storage room, or otherwise – though on a regional basis there have been some replaces crops not dependent on conventional instances of storage pressures. storage, for example, cotton or alfalfa. The rising Since 987 total storage capacity in Kansas demand for storage has led to grain being stored has been above a billion bushels (on-farm grain in temporary structures, the leasing of old facili- storage data first became available in 986). ties, and a renewed interest in the construction of From 987 through 2006 total production of the new storage structures. four major grain crops ranged from 67 to ,253 Kansas traditionally has stored the majority of million bushels, with total production surpassing its grain production in commercial elevators, as a billion bushels eight times. Given the current opposed to in on-farm storage facilities (Figure ). trend towards more corn acres and assuming a In 2006, on-farm storage capacity in Kansas was return to trend yields, without expansion storage approximately 3 percent of the total storage capacity in Kansas likely would be strained in capacity in the state, compared to an average of futures years as it was in the late 990s. However, about 57 percent across the United States. Year- a question that arises is, Will this expansion be to-year total storage capacity in Kansas trended with additional commercial storage, or will it take downward from 987 to 997 before increasing in place at the farm level? the late 990s and remaining relatively constant since 2000. The increase in storage capacity from Effects of Ethanol 997 to 2000 was primarily with off-farm storage The current trend toward significantly higher rather than on-farm storage. In 2006, on-farm and levels of ethanol production potentially plays the off-farm storage capacities were estimated at 395 largest role in the increased interested of on-farm and 890 million bushels, respectively, totaling storage. In June 2007, eight ethanol plants were .285 billion bushels of Figure 1. Grain (wheat, corn, grain sorghum, and soybeans) production versus storage total grain storage capacity capacity in Kansas. in Kansas. This compares to .42 billion bushels of 1,750 storage capacity in 997. On-farm O-farm Production Total production of the 1,500 four major grain crops in Kansas (wheat, corn, grain 1,250 sorghum, and soybeans) peaked in the late 990s and generally has been 1,000 down since that time (Figure ). This decline 750 in production has been due to total planted acres Million bushels decreasing slightly (net 500 of decreases in wheat and sorghum and increases 250 in corn and soybean acres) and relatively poor 0 yields due to unfavorable 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 weather in a number of Source: USDA Grain Stocks report and Kansas Ag Statistics Figure 2. Kansas planted acres of corn, sorghum, and soybeans, 1997-2007. ignores the large demand 4,500 for corn from the Kansas Corn Sorghum Soybeans feedlot industry. As prices of commodities change 4,000 to reflect this increased demand, producers will have an incentive to 3,500 replace wheat and soybean acres with higher-yielding corn acres and those added bushels will result in the 3,000 need for additional grain Thousand acres Thousand storage capacity. Considering corn, 2,500 grain sorghum, and soybeans, which often compete for the same 2,000 acres, the number of 1997 1999 2001 2003 2005 2007 acres planted to corn has 1998 2000 2002 2004 2006 increased significantly Source: Kansas Agricultural Statistics Service compared to grain sorghum and soybeans in operation in Kansas, producing 25.5 million (Figure 2). Grain sorghum acres have decreased gallons per year (MGPY). At that time, six addi- considerably since 200, being replaced by corn tional plants were under construction, which and soybeans. However, in response to increased would add another 300 million gallons of annual ethanol production, planting intentions for 2007, production. Finally, an additional 0 plants are as of June 2007, suggest a large drop in soybean under consideration, which would produce acres, with corn acreage increasing and sorghum another 856 million gallons of ethanol per year acreage remaining steady to increasing slightly (Kansas Ethanol). compared to 2006. It is estimated that a bushel of corn or The additional corn production most likely sorghum produces 2.6 to 2.8 gallons of ethanol, will arise from grain producers switching planted which means that each additional 00 MGPY of acres from soybeans to corn. Once acres have ethanol production requires approximately 37 been switched from soybeans to corn, the bushels million bushels of corn or sorghum. Thus, current of production drastically increase per acre. For plants demand about 80 million bushels of corn example, in 2006, the statewide average yield annually, while plants under construction and for soybeans was 32 bushels per acre while the under consideration would have an additional statewide average corn yield was 115 bushels annual demand of 111 and 37 million bushels, per acre. These numbers suggest the average respectively. corn yield was more than three times the average If all proposed plants were completed, total soybean yield. From 997 to 2006, the ratio of corn annual demand for corn, just for Kansas ethanol yield to soybean yield has been 4.5, suggesting an plants, would be approximately 508 million even larger effect than might have been observed bushels. Kansas corn production averaged in 2006. From 997 to 2006, harvested acreage slightly over 44 million bushels annually for the of corn and soybeans has been 2.908 and 2.654 years 2004 through 2006. To supply ethanol plants million acres, respectively. Figure 3 shows how currently in operation in Kansas, about 9 percent total production of corn and soybeans would of this production would have been used. increase as soybean acres are replaced with corn However, the corn required to supply existing acres holding yields constant at 997 through 2006 and all proposed ethanol plants would require averages (32.4 bushels per acre for corn and 30.4 almost 23 percent of the average annual produc- for soybeans). The combined production of the tion for 2004 through 2006. This completely two crops for the base scenario (997 through 2006 2 Figure 3. Annual production resulting in switching from soybean to corn acres. On-Farm Storage 600 While Kansas has Soybeans Corn historically relied heavily 3,704 on off-farm (commercial) 500 3,439 3,173 storage, a number of 2,908 factors may lead to future 400 increases in the amount of on-farm storage. In Harvested acres — increase in addition to the increased 300 corn acres is set exactly equal demand associated with to reduction in soybean acres (total corn and soybean acres ethanol production, several Million bushels 200 remains constant). additional reasons for the interest in on-farm storage are () increasing acreage 100 of specialty crops and the 2,654 2,389 2,123 1,858 need to preserve the iden- 0 tity of crops; (2) farmers 100% 90% 80% 70% changing their crop mixes Soybean acres (relative to base -- 1997-06 average) due to production flex- ibility; (3) producers using larger trucks, making it average) was 466.6 million bushels. Assuming easier for them to haul grain directly to its final 20 percent of the soybean acres were diverted to destination, thereby bypassing local grain eleva- corn, the total production of the two crops would tors; (4) harvest time bottleneck concerns; and increase more than 50 million bushels, to nearly (5) to a lesser extent, grain quality issues. 520 million bushels (+11.4 percent). Thus, it can be As producers increase their acreage of seen how switching crops in response to changing specialty crops or crops that require identity relative prices induced by policies regarding preservation, commercial storage may not be a ethanol production and use can impact grain viable alternative and thus on-farm storage is storage needs in Kansas. necessary. Additionally, as producers change their The next issue becomes where to store the crop mix (i.e., plant more summer crops and less added bushels of production. Because ethanol wheat), on-farm storage may be more economical plants typically store 4 days worth of corn if producing multiple crops allows bins to be used needed for ethanol production, the remaining for more months out of the year. corn needed must be stored in off- and on-farm Producers using larger trucks often have more storage facilities (Patrico, 2007). flexibility as to where their crops are marketed, In addition to holding grain to capture increasing the benefit of on-farm storage rela- seasonal price strength, an advantage may exist tive to commercial storage. On the other hand, for producers to store corn that potentially will producers who historically have had on-farm be sold to ethanol plants.