| Written July, 2003 |  |
 |
File C2-24 |
||
 |
|||||
Computing a Grain Storage Rental Rate
Don Hofstrand, extension farm management specialist, 641-423-0844, dhof@iastate.edu, William Edwards, extension economist, 641-294-6161, wedwards@iastate.edu
| Use this decision tool to estimate a grain storage rental rate.
|
Is there a simple and uniform method of figuring a rental rate for farm grain storage? Probably not, but some useful guidelines are outlined below. Remember, the fixed location of buildings often narrows the market to one or two prospective tenants.
Estimating a fair rental value for farm grain storage can be based on:
- what others are charging
- commercial rates, or
- ownership costs
What Others are Charging
A common method is to charge what everybody else is charging. An indication of what others are charging can be found in Information Files Farm Building Cash Rental Rates and Iowa Custom Rate Guide Survey.
Commercial Rates
In some cases grain storage rental is available from a commercial source (elevator) at an established price. So farm storage rates can be based on commercial rates minus an appropriate discount. Farm storage rates tend to be below commercial rates because the renter must provide labor, manage the grain in storage, and assume the risks of spoilage and shrinkage. Nevertheless, commercial storage rates serve as an unbiased indicator of storage costs that reflect current costs and the supply and demand for grain storage.
A suggested rental charge for farm corn storage is about two-thirds to three-fourths of the local rate for commercial storage. For example, to compute a farm storage rate for corn for six months, first identify the commercial rate. A typical rate is an initial charge of 8 to 10 cents per bushel for the first 3 months of storage and an additional charge of from 1.5 to 2 cents per bushel for each additional month. This amounts to a six-month commercial rate of from 12.5 cents (8 + (1.5 x 3) = 12.5) to 16 cents (10 + (2 x 3) = 16). The farm storage rate is estimated to range from 8.4 cents (12.5 x 2 / 3 = 8.4) to 12 cents (16 x 3 / 4 = 12).
Ownership Costs
The most significant ownership costs are:
- depreciation,
- return on investment,
- repairs,
- taxes, and
- insurance.
Depreciation
Depreciation is the portion of the original cost of the grain bin that is counted as an expense each year. It is a way of spreading the cost of the grain bin over its expected useful life. Table 1 shows the expected useful life of grain storage and drying equipment. The annual depreciation (percent) of a grain bin with an expected useful life of 20 years is 5 percent (100 percent divided by 20 years equal 5 percent per year). For a $10,000 grain bin, annual depreciation is $500 (5 percent x $10,000 = $500).
Return on investment
Return on investment in the facility is calculated by multiplying an expected return on investment (annual interest rate) by the average value of the grain bin over its expected useful lifetime. For example, return on investment is $300 for a $10,000 grain bin. This is figured by multiplying one-half of the original investment ($5,000) by a return on investment of 6 percent.
The rate of return on investment can be the rate at which money is borrowed, the rate at which money can be invested, or somewhere in between. One-half of the original purchase price is used instead of all of the original purchase price. The first year the bin is worth $10,000, but each year thereafter the value declines due to depreciation. At the end of its useful life the bin is worth nothing. So the average value over the useful life is $5,000, halfway between $10,000 and $0.
Repairs
Repairs are needed to maintain the bin in a useable condition. To estimate annual repair costs use a rate of one to two percent of the original purchase price of the storage bin. For drying and handling equipment use 3 to 5 percent of the original purchase price.
Taxes and insurance
Taxes can be figured by multiplying the local property tax rate times the assessed building value. As an alternative, use one percent of the original purchase price. In most states no property tax is assessed on equipment.
Insurance costs can be obtained from the insurance policy or use one-half percent of the original purchase price.
An example of estimating the annual ownership costs of a grain storage bin is illustrated in Table 2.
Other Considerations
Below are other items you may consider when developing a building lease.
Rent per year or per month
Rent can be charged for the entire year or for each month the grain is in storage. The fixed rate per year is an annual charge for the right to use the grain storage. The same rate is paid if the bin is used for one month, twelve months, or not at all.
With a monthly charge, rent is charged only for the months that the storage bin is used. With this method the bin might be used for one month, six months, or all twelve months of the year.
Most on-farm storage is rented for a yearly rate since it usually cannot be used more than once a year.
In the case of a drying bin, separate charges can be made for each bushel dried and each bushel stored. For custom drying changes see Information File Iowa Custom Rate Guide Survey.
Payment schedule
The payment schedule should also be considered. The rental arrangement can specify that a minimum charge is paid at the beginning of the lease period with the remainder due when the grain is removed.
Term of lease
It is suggested that the grain must be removed from the storage facility by September 1. If the tenant desires to lease the grain storage beyond that time, a new leasing arrangement should be made. A September 1 provision makes the storage facilities available for the upcoming crop.
Electricity costs
Electricity is another cost paid by the grain owner. The ideal situation is to have a separate electric meter for the grain storage bin so the actual electricity cost is known. However, there may be just a single electric meter for the entire farm. So the electricity usage needs to be estimated. The electricity used by the fans and stirators can be estimated by multiplying the number of hours each motor runs by 85 percent of the horsepower rating of each motor by the cost per kw-hr of electricity used.
An example will help illustrate. Let’s use a 10 horsepower (h.p.) fan motor running 100 hours, a 2 horsepower stirator running 50 hours, and electricity cost of 8 cents per kw-hr. The estimated total cost is $88.
