Each month the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa. Following are the questions they are answering this month.
Do you suggest any rules of thumb for when a farmer should or shouldn’t build another bin? We already have some on-farm storage, but last fall with good yields we ran out of space. Yields aren’t that good this fall, but I end up filling our bins every year with corn and soybeans. I haul the remainder of the corn to town and pay commercial storage at the elevator. I’ve heard a helpful rule of thumb for evaluating on-farm storage capacity is being able to store 80% of your average production. I’m now at about 50%.
Plastina: Every operation is different, so I don’t put too much value on rules of thumb when making investment decisions. Analyzing grain storage alternatives involves discussing not only the production side (how much corn and beans will your operation produce annually over the next 10 years), but also the commercial or marketing side, as well as the cash flow projection. In particular, when do you typically deliver your grain? Closer to February or closer to August?
If you store it for only a few months, then renting commercial storage might be cheaper. But the cumulative variable costs of on-farm storage will likely be lower than the cumulative commercial storage costs if stored for a full year. If you store production for several months at a time each year, then the question of whether your cash flow can support the initial investment in another bin becomes relevant.
Ag Decision Maker’s A2-35, “Grain Storage Investment Comparison,” can compare costs of building on-farm bins, investing in condominium storage, and renting commercial or on-farm storage.
Stout: My rule of thumb is to have enough crops presold so I can store the remaining crops in my own storage bins. If you have an efficient drying system you can make a few cents per bushel by drying at the farm, rather than paying for commercial drying.
As I write this, my local carry from October to March is 25 cents on corn and 37 cents on soybeans, with an additional 11 cents and 21 cents, respectively, to carry to June. If you can sell your crops ahead to capture that carry in the market, then you can easily pay for storage in a few years.
If because of cash flow or other reasons you are not able to hold the crops long enough to capture that carry, then on-farm storage may not pay for all of your production. Evaluate your own situation and look at the carry in your local market to decide if building bins will pay for you.
Miller: Storing two-thirds of your crop should be sufficient. For the rest of your grain, you should forward-price. If you have too much storage, it is too tempting to put it in the bin and forget it.
Then by the time you pay interest on the money tied up in grain, and pay the cost of maintaining the grain quality, you may wind up with less money than if you had forward-priced the grain for sale out of the field. In some markets, ethanol plants pay a premium for corn sales after Jan. 1, so you can get compensated for storing your grain into the spring, and that can help pay for a bin.
For example, our local ethanol plant shows a difference of 28 cents between October and January delivery. However, the local bean processor only shows a difference of 7 cents between October and January delivery, which is not nearly enough to justify storing beans. Remember, just because you own the bin doesn’t mean the storage is free.
Be fair to your landlord
My landlord adjusted my cash rent down this year because of the tough financial situation in ag. Now this year looks like it will turn out better for my operation than I had thought. How can I compensate him fairly this year? I want to continue renting his land in the years ahead.
Stout: Since your landlord has been generous in lowering your cash rent, then it would be a nice gesture on your part to give a modest bonus if net income exceeds your expectations. I would wait until after harvest before I made that offer so you can ensure those expected yields. Price also enters into the equation when you determine net income per acre, so take that into account before you offer the bonus.
Miller: This might be an ideal time to show the landlord how a flexible lease can work to the landlord’s advantage, as well as the farmer’s. Put together some calculations that show how much more the landlord can get if you use this year’s rent figure as a “base rent” and then compensate him/her further with flex pay provisions. You can offer to pay the landlord all (or a portion) of that flex amount this year as a token of good will, and as an incentive to get a new flex lease signed and put in place for next year.
Zhang: Congratulations on your long-term thinking and your empathy. Trust and good communications are critically important for the long-term landlord-tenant relationship, especially when you want to keep renting his land in the future. As you correctly noted, the cash rents in Iowa and across the Midwest are trending down for four consecutive years due to the ag downturn.
However, recent surveys showed that Iowa land values on average increased by 3% due to limited land supply, which might be a useful benchmark when thinking about the magnitude of the compensation. Talk with your landlord and negotiate a rate that you both view as fair. You may also consider discussing the possibility of a flex lease (cash rent plus crop share) and extending the lease terms to reduce uncertainty for the landlord and for yourself.