GSI: Mid-South storage boom
Dec 17, 2008 9:43 AM
As grain production has become more popular there’s also been much talk from farmers regarding storage. One of the most frequent questions: what’s the payback?
Illinois-based GSI, the world’s largest manufacturer of steel farm bins, commercial storage grain bins and grain silos, can now provide easy answers.
“We’ve developed a tool and rolled it out to our dealers to allow them to consult with the farmers,” says Ken Goss, GSI vice president of sales development. “Anyone interested can just contact a GSI dealer and he’ll run the program. We find out how many acres a farmer has, what his normal yields are, what the elevator and drying costs are. From that information, we create a custom report — a “Return on Investment” model — telling exactly when the (new storage expense) will pay itself off.”
Farmers can take the report to a banker. Right now, “farm creditors are saying even before getting an implement, a farmer should be investing in storage because it has the quickest payback.”
A typical example for someone who farms only rice on 2,500 acres and yields 170 bushels per acre shows that, over a decade, a farmer without storage could lose $3.5 million, says Goss. Meanwhile, the payback for a $980,000 storage investment — all the storage costs: bins, concrete, electrical, everything fully loaded — pays off in just over two years. Storing dry bushels, the nearly $1 million investment would have a capacity of about 450,000 bushels.
There are several reasons grain storage is going up all over the Mid-South.
“The payout for cotton isn’t as high as it used to be. Just in terms of return on investment, corn pays very well. So (that helps explain why Mid-South) cotton farmers are looking hard at corn.”
On a worldwide basis, the UN recently commissioned a report looking at all the different commodities. “The report said, for the most part, eventually most soybeans will come out of Brazil. Most wheat will be out of former Soviet republics in east Europe.”
The report also said the world can’t live without corn and “just recently, China has passed into a corn deficit.”
Then, in the Dakotas, where just 10 years ago farmers couldn’t grow corn, they now can. Whether due to “shifting seasons over time — or global warming, if you buy into that — a lot more acres are in corn there instead of wheat.”
Another reason to consider storage includes ethanol production facilities hitting hard times with some forced to file for bankruptcy.
At the same time, “there are places in Australia where wheat is piling up on the docks because, globally, people can’t secure lines of credit to buy the commodity.”
Goss says as the credit crisis worsens, “Unless you have grain storage on the farm, you’re taking a huge risk. You’re betting someone else will be able to take possession of your grain at harvest.”
The combination of basis and carry has also been a thorn in farmers’ collective side.
“The way we look at (storage benefits) is a combination of two things. Carry is when you can hold your grain at harvest and sell it, perhaps, two months before the next harvest. Typically, that is three times the cost of borrowed money. If the cost of borrowing money is 5 percent, that would mean a 15 percent premium.
“On top of that is the basis, the difference between what the local elevator will pay you versus what you can make by selling it yourself.
“The basis is huge because so many of the facilities aren’t taking delivery at harvest because the people can’t secure lines of credit to buy the crop. The nice thing about storage is you can hold your commodity until the demand is such that it’s worth selling.”
The combination of those two things usually “provides a double-digit return. There’s even a hedge fund in New York that bought out a wheat elevator in Idaho just because the returns on the commodity are so huge.”
Does GSI see grain farming picking up even more in the Mid-South?
“We do. Right now, the highest returns are for rice. When you take it to the elevator, the amount being charged as shrinkage versus the actual shrinkage has a big disparity. People lose a lot of money there. Drying costs are also extremely high.”
