AgDM newsletter article, August 1997

How to make country elevators competitive

by: C. Phillip Baumel, Extension Economist, 515/294-6263, pbaumel@iastate.edu

Increasingly farmers are bypassing country elevators when merchandising their grain.  For example, during the 1994-95 crop marketing year, over 30 percent of the corn and 25 percent of the soybeans moving from Iowa farms bypassed country elevators. 

How can country elevators stop this erosion of business?  In an attempt to design strategies for coping with this erosion, we analyzed ten Iowa country elevators.  These elevators were chosen to represent a wide range of technologies and sizes typical of elevators in the western corn-belt.  For example, storage capacity ranged from just over one million to over six million bushels.  Bushels handled in 1994-95 ranged from 2.5 million to over 13 million.

Cost analysis

The elevators were analyzed on the cost per bushel of moving grain through their facilities.  The primary focus was to examine how cost per bushel changed due to changes in grain volume.  The crop marketing years of 1993-94 and 1994-95 were chosen because of the large increase in the volume of grain handled from one year to the next. 

The volume of grain increased by 67 percent from 1993-94 to 1994-95 as shown in Table 1.  Due to the increased volume, the cost also increased, but not in direct proportion to the increase in volume.  Total costs increased by only 13 percent.  Labor and other operating costs increased by only 9 percent.

Table 1. Costs of 10 local Iowa elevators

1993-94

1994-95

Percent Change

Volume (bu.)

26,445,133

44,259,374

+ 67%

Cost (total)

Labor

$1,712,421

$1,859,422

+ 9%

Other operating

412,238

450,089

+ 9

Fixed

1,907,098

2,251,996

+ 18

Total

$4,031,766

$4,561,506

+ 13%

Cost (per bushel)

Labor

6.5 cents

4.2 cents

- 35%

Other operating

1.6

1.0

- 38

Fixed

7.2

5.1

- 29

Total

15.2 cents

10.3 cents

- 32%

Total (range)

11.8 - 21.4

8.4 - 12.9

Because costs did not increase in direct proportion to the increase in volume, the cost per bushel decreased.  The total cost per bushel decreased from 15.2 cents in 1993-94 to 10.3 cents in 1994-95, for a 32 percent decline. 

The range in cost per bushel among the ten elevators was substantial.  The range in total cost in 1993-94 was from 11.8 to 21.4 cents per bushel.  For the 1994-95 crop year the range was 8.4 to 12.9 cents.

Implication

For western corn-belt country elevators of similar size, the analysis conclusions listed below apply and the following implication can be drawn.

Thus, the best way to reduce per bushel handling costs is to increase the volume handled per elevator.

Strategies

Below are strategies country elevators may consider to increase competitiveness.

Close elevators

One way that multiple elevator firms can reduce per bushel handling costs is to consider completely closing high cost elevators.  If these firms can attract most of the business from the closed elevators to the remaining elevators, per bushel handling costs will fall in the elevators that inherit the additional bushels. 

The lower handling costs can be converted into:

Improve labor management

Labor represents 75 to 85 percent of total operating handling costs.  Thus, improved labor management is another way to reduce per bushel handling costs.  Alternative ways to reduce labor costs are to: 

Increase grain bids

Farmers who own semis can profitably haul their grain up to seven miles for a one-cent higher grain bid.  Reducing your in-house handling costs will enable country elevators to share the savings with customers.  The best way to reduce per bushel handling costs is to increase the number of bushels handled by your low cost elevators. 

Closing your high cost elevators completely should allow you to increase your bids at low cost elevators, which will attract more grain delivered in large trucks, which in turn, will reduce your handling costs further.  A second way to reduce handling costs is to open your high cost elevator only during harvest or only two- or three-days per week.      

Conclusion

The impact of increased bushels on grain handling costs, along with changing rail rate structures, and the increasing amount of grain hauled from farms in semis, provides major incentives to dramatically change the structure of the grain elevator industry.  Those firms that plan for these changes now are likely to reap the benefits of increased grain receipts and increased profits.

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