By Lowell Hill and John Otte
Every time farmers deliver grain to a buyer and the grain is below the moisture content that’s used to price the grain, the farmers lose money. That’s because they delivered enough dry matter for the load to amount to more bushels, had the grain contained enough water to be at base moisture content. But farmers get no payment for the extra dry matter, and dry matter is what gives value for feed and processing. Water has little value.
USDA first addressed the issue in a 1916 bulletin titled “Intrinsic Value of Grain is Based on Dry Matter Content.” When field shelling of corn and heated-air drying of harvested grain arrived in the 1950s, farmers began delivering grain at a wider range of moisture contents, both below and above the base. That’s when equitable payment for grain with moisture contents below the base became a contentious issue. It remains contentious 60 years later, as grain buyers still refuse to price grain on the basis of dry matter.
Understanding the issue
When buyers purchase grain with a moisture content above the base moisture used to price it, they adjust the quantity of grain downward to compensate for less dry matter, and they assess a drying charge to remove excess moisture. But when buyers purchase grain with a moisture content that’s below the base moisture, they make no upward adjustment in quantity to reflect the extra dry matter.
A straightforward solution to this disparity has been publicized since 1967. Adjust the quantity of loads of grain with moisture contents that are below, as well as above, the base moisture to the number of bushels that would be in each load had it been delivered at the base moisture content. That is — adjust it to equivalent bushels. Doing so would distribute payment for the crop more equitably among farmers who produce the dry matter, which has the value.
Tallying up bushels lost
Here’s an example to illustrate how this works (see table). A farmer delivering a load of corn weighing 56,000 pounds at 15% base moisture content, which is used to price it, gets paid for 1,000 bushels. The corn contains 47,600 pounds of dry matter and 8,400 pounds of water.
A load of corn weighing 56,000 pounds at 18% moisture is equivalent (based on dry matter) to 54,023 pounds of grain (964.7 bushels) at base moisture of 15%. If the farmer got paid for 964.7 bushels he incurred no loss; he just didn’t get paid for the extra 1,977 pounds of water in his truck. Most elevators use a pencil shrink factor that is higher than the moisture-only shrink to compensate for other costs. A 1.4% pencil shrink factor would reduce the weight of this load to 53,648 pounds (958 bushels), resulting in a loss of 375.5 pounds. The farmer loses 6.7 bushels due to the reduction in quantity beyond the reduction to equivalent bushels based on dry matter.
A load of corn weighing 56,000 pounds at 12% moisture contains enough dry matter to be equivalent to 57,976.5 pounds (1,035.3 bushels) at 15% base moisture. This farmer loses the opportunity to sell 1,976.5 pounds of water at the price of grain. If the 56,000 pounds had been adjusted to the equivalent bushels, he would have been paid for 57,976.5 pounds (1,035.3 bushels) at base moisture.
In summary, the farmer delivering 18% moisture corn loses 6.7 bushels due to pencil shrink being greater than the actual loss of water. The farmer delivering 12% moisture corn loses 35.3 bushels as a result of delivering excess dry matter. Multiply that times the current price of corn.
Understand the inequalities
Not adjusting the quantity of grain delivered below the base moisture content upward to equivalent bushels at the base moisture creates two problems:
• It creates inequity among farmers. Farmers who dry grain to moisture levels for safer storage (e.g., 14.5% for corn) receive an indirect penalty of lost weight of water that could have been sold at the price of the grain had the grain been at the base moisture.
• It creates incentives to add water. The loss in quantity, and therefore value, due to water that was removed during drying in the field or in the bin creates an incentive for farmers and elevators with grain below the base moisture to add moisture.
Why the grain trade balks
For decades, the grain trade has strongly opposed recommendations for buying grain on the basis of dry matter or for paying premiums for grain below the base moisture used to price it, or for using a reverse shrink to adjust the quantity of grain to equivalent bushels. Why is opposition to such logical and equitable solutions so strong?
Two common reasons often cited: “We’ve always done it this way. Why change now?” and “The current system generates blending income and profit for the grain buyer.”
Here’s how the buyer profits. The buyer pays less for grain above the base moisture by adjusting quantity (pencil shrink) or price (discounts). The buyer also assesses a drying charge.
The buyer also pays less per pound of dry matter for grain below the base moisture, because it contains more dry matter and less water. The farmer receives full price per bushel, but for a lesser quantity than had the grain contained enough water to bring it up to the base moisture. The buyer pays nothing for the additional dry matter.
By blending the wet and dry loads, the grain buyer transfers the excess water from the 18% moisture load to the extra dry matter in the 12% moisture load and ends up with more total bushels at base moisture with no cost for drying.
Another reason buyers balk is that grain dried below the base moisture can generate more dust and broken kernels during handling. Buyers may incur a cost for cleaning, which they can offset with a separate fee on grain significantly below base moisture.
If buyers were to adjust the quantity of grain delivered below the base moisture upward, they argue that they would end up buying more bushels and paying more for the total crop. Agreed, their records would show more bushels purchased. But the total crop would contain the same dry matter and have the same value. Competition among grain buyers would bring prices in line with value, just as they were before the change in buying practices.
A single grain buyer may have difficulty unilaterally making the change, because that buyer would pay farmers with lower-moisture grain for more bushels than under the current system, and would lose the income from blending. However some buyers have made a step in that direction by “pencil blending” loads slightly above and slightly below the base moisture content so as to pay farmers for equivalent bushels based on the dry matter in multiple deliveries.
Farmers have some options though:
• Put early harvested wet grain and drier grain in separate bins. Then blend when ready to deliver.
• Time harvest to deliver grain that’s at a moisture content just above the base. Total returns on grain above the base moisture content can be greater, despite shrink and drying charges, than total returns on grain delivered below the base moisture, where the farmer foregoes the opportunity to sell water at the price of grain.
• Use automatic humidity and temperature controllers on stored grain to bring it to base moisture at time for delivery. The Food and Drug Administration rules this practice as “adulteration” and “illegal” if done for the purpose of “increasing value.” However, adding moisture through controlled aeration if done for the purpose of “improving quality” is not considered adulteration, even though the same technology is used for both purposes.
Increasingly sophisticated on-farm grain quality management facilities may allow farmers of the future to deliver all grain from on-farm storage at the base moisture content. However, wheat and soybeans often come out of the combine below the base moisture. Those growers will still give away unknown, but relatively easy-to-calculate, quantities of dry matter.
Hill is a University of Illinois professor emeritus of agricultural economics. Otte is the former economics editor for Farm Progress.