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The Economics of Storage

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The Economics of Storage
AG BM 102
Introduction
• One crop a year means storage in some
form
• No one will store without the expectation
of making money
• Economics of storage explains this
The economics of time
• Money now more valuable than money
later
• Interest on deferred money a cost
• Also physical costs of storage
• Also risk
• Deterioration
A simple model
• 2 periods – one with harvest, one without
• Costs money to store until next period
• Market equilibrium is total supply = total
demand
• Total demand = demand now + demand
later
To transform future demand to
the present, storage cost must
be subtracted from the price.
This is a vertical shift down.
To get total demand, add the
demand for each period together
horizontally. This can be done
algebraically or by using carefully
drawn graphs
The place where total supply
crosses the demand curve
determines the price now and the
quantity supplied
The quantity stored, which is also
the quantity demanded later, is
found by finding where the price
now, crosses the demand curve for
later, adjusted for the storage
costs, and then taking this quantity
up to the original demand curve for
the later period. The price later will
be the price now plus the storage
costs.
Economics of Storing Grain
Why Store Grain?
• Market incentive
• Marketing Flexibility
• Time Management
Basis
The difference between the
price on the futures market
and your local price at some
point in time
Example
• Price in Chicago Thursday $3.48 on the
December 2014 corn contract and $3.70
on the May 2015. Price in Pennsylvania
on Monday was $3.56. So the time value
of storing for two months until December is
14 cents. The premium to store until May
is 35 cents.
Market Incentive Corn
•
•
•
•
•
•
•
Price in Chicago Dec = $3.48
Price in Chicago May = $3.70
Price in SE PA now = $3.57
Avg May Basis = $0.29
Expected Price May = $3.70+$0.29=$3.99
Expected Market Incentive
$3.99 – 3.57 = $0.42
• One way to look at this is the $0.42 has
two pieces
• $0.13 for time and $0.29 for distance,
which total $0.42
• Now compare this to your storage costs
Costs to Consider
• Ownership Costs of Facilities and
Equipment
• Opportunity cost for value of grain
• Extra shrink and drying costs
• Dry matter loss
• Electricity costs for aerating and moving
• Labor for checking and handling
Fixed Costs
•
•
•
•
•
•
Depreciation
Interest
Repairs
Taxes
Insurance
A new bin costs about $2.00/bushel or
more for 10,000 bu. bins or larger.
Smaller bins will cost a bit more per bushel
Fixed costs are only an issue
until the bins are built. After
that they are sunk
Variable Costs
•
•
•
•
•
•
Interest on grain
On-farm drying costs
Shrinkage costs
Labor Costs
Quality Discount
Other
Variable Costs
Item
Amount
Interest 5 months@5%
$0.073
Drying Costs
$0.045
Shrinkage Costs
$0.067
Labor Costs
$0.015
Quality Discount
$0.000
Total Variable
$0.200
Do You Store?
• Based on these costs and prices- store
your corn
• Each year is unique and also within a year
• The incentive is 42 cents and your costs
are 20 cents. This year the market is
saying “Store your corn!”
Is it a good idea to store your
own grain?
• How much is the expected price
differential?
• How much are your variable costs?
• Do you want the headache?
• Do you already own the bin?
• Are the time management issues
important enough to offset any storage
losses
Storage Summary
•
•
•
•
Economics of storage straightforward
Someone must do it
Prices give incentive
Market must reflect storage costs
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