Crops > Machinery > Machinery Management

##### Written August, 2017

File A3-41

## Estimating Grain Transportation Costs

Marketing grain involves making decisions about when to sell, how to sell, and where to sell. With the increased availability of ethanol plants, feed mills, barge loading facilities, and grain processors, farmers have many choices for a selling location. Choosing among the options requires an accurate estimate of the cost of transporting the grain to each location.

Tractors and wagons have traditionally been used to move grain to nearby locations. Trucks are more often used for longer hauls. In recent years, semi-trailer trucks have become the most common means of transporting grain.

Grain transportation costs can be divided into two categories: **ownership **costs, which occur regardless of how much the truck or tractor is used, and **operating **costs, which vary directly with the number of miles driven.

### Ownership Costs

Also called fixed costs, include depreciation, interest, insurance, and licenses.

### Depreciation

Depreciation is a cost resulting from wear, obsolescence, and age. Age and accumulated miles of use are the most important factors in determining how fast a truck depreciates. Many farm trucks are purchased after having been used for over the road hauling, so they may have a high number of miles on the odometer.

Before an estimate of annual depreciation can be calculated, the initial purchase price, the number of years the truck will be owned, and a salvage value must be estimated. Salvage value is an estimate of the sale value of the machine at the end of its ownership period. It is the amount you can expect to receive as a trade-in allowance or an estimate of the used market value if you expect to sell it outright. Used vehicle websites or classified ads are good sources of information about used truck values.

For example, assume the purchase cost (used) of a semi-truck tractor was $45,000, and the estimated salvage value after 10 years is $20,000:

### Interest

If you borrow money to buy a truck, the lender will determine the interest rate to charge. But if you use your own capital, the rate to charge will depend on the opportunity cost for that capital elsewhere in your farm business. If only part of the money is borrowed, an average of the two rates should be used. For the example we will assume an average interest rate of five percent.

The joint costs of depreciation and interest can be calculated by using a **capital recovery factor**. Capital recovery is the number of dollars that would have to be set aside each year to just repay the value lost due to depreciation and to pay the interest cost.

Table 1 shows capital recovery factors for various combinations of interest rates and ownership periods. For the example, the capital recovery factor for 10 years and five percent is .130. The annual capital recovery cost is found by multiplying the capital recovery factor by the total depreciation over the ownership life, then adding the product of the interest rate and the salvage value to it.

For the example values given:

For a semi-trailer truck the cost for the trailer can be estimated separately or combined with the truck. In the example, the trailer is assumed to have a purchase price of $25,000, an ownership life of 20 years, and a salvage value of $5,000. The capital recovery factor for five percent and 20 years is 0.08, so the annual capital recovery cost is:

### Insurance and License

Costs for insuring and licensing a grain truck are usually much smaller than depreciation and interest, but they need to be considered, nevertheless. Insurance and license fees can be verified by farm records. In our example, they are estimated to be $350 and $500 per year, respectively, but they can vary widely.

### Total Ownership Cost

The estimated costs of depreciation, interest, insurance, and license are added together to find the total ownership cost. For our example truck, this adds up to $6,950 per year.

### Operating Costs

Also called variable costs, include repairs, replacement of tires, fuel, lubrication, and operator labor.

### Repairs and Maintenance

Repair costs occur because of routine maintenance, wear and tear, and accidents. The best data for estimating repair costs are the owner’s own records of past repair expenses. Ag Decision Maker File A3-16, Grain Harvesting Equipment and Labor in Iowa, shows reported repair and maintenance costs for grain trucks from a recent Iowa survey. In our example, the owner estimates annual repair costs to be about $3,000 for the truck and $500 for the trailer.

### Tires

Replacement of tires is a significant maintenance cost. The average number of tires purchased each year depends on the life of each tire, the number of miles driven, and the number of tires on each truck or trailer.

In our example, the semi-truck tractor has 10 tires with an expected life of 40,000 miles and a replacement cost of $400 each. If the truck is driven 8,000 miles per year, an average of two tires must be replaced each year, at a total cost of $800.

Similarly, if the trailer has eight tires with an average life of 50,000 miles and a replacement cost of $250, the annual costs for trailer tires is:

### Fuel

Fuel costs can be estimated by dividing the total miles the truck is driven each year by the average fuel efficiency (in miles per gallon) to find the total gallons of fuel used, then multiplying by the average cost of fuel per gallon.

In the example, the truck is driven 8,000 miles per year and the average miles per gallon achieved is assumed to be 5.0, so 1,600 gallons of fuel are used annually. If the price of fuel is $2.65 per gallon, the annual expenditure is:

### Labor

The cost of labor can be the wages paid to the driver of the truck or the value of the operator’s own labor. Hours of road time can be estimated by dividing the total miles the truck is driven each year by the average speed at which it is driven.

Additional hours spent loading and unloading (including hours waiting in line) can be added. The total hours are multiplied by the assumed wage rate to estimate the total labor cost.

For our example, the truck is driven 8,000 miles per year at an average speed of 50 miles per hour.

### Total Operating Cost

Repairs, fuel, lubricants and labor costs are added to calculate total operating cost. For the truck example, the total operating cost is:

### Total Cost

After all costs have been estimated, the total ownership cost per year can be added to the operating cost to calculate the total cost to own and operate the truck. Total cost for our example is:

### Cost per Bushel or per Mile

Sometimes it is useful to calculate the total cost per mile driven or bushel hauled. In the example it was assumed that the truck was driven 8,000 miles per year, so the average total cost per mile would be:

Remember, for hauling one load the round-trip miles should be used to calculate the total cost of the trip.

If 50,000 bushels of grain are hauled each year, the average cost per bushel hauled would be:

When comparing the cost of hauling to alternative sites, only the operating costs need to be taken into account. The ownership costs will not change if more or fewer miles are driven. In the example, the operating cost per mile would be:

If one potential grain selling location is 10 miles from the farm and another buyer is 75 miles away, the total operating costs for hauling to each one would be:

The difference is equal to $208 per trip. If 1,000 bushels are hauled each trip, the price at the second location would have to be ($208 / 1,000 miles) = $.208 per bushel higher to make up for the greater hauling cost.

The worksheet at the end of this publication can be used to calculate the cost of transporting grain for your own situation. Ag Decision Maker Decision Tool A3-29, Grain Truck or Wagon Transportation Calculator, contains an electronic spreadsheet for estimating grain transportation costs using either a truck or a tractor and wagon combination. Ag Decision Maker Decision Tool A2-32-A3-41, Grain Bid Comparison Tool, allows you to easily compare grain bids at different locations, taking into account hauling costs as well as moisture discounts and drying charges.

William Edwards, retired economist. Questions?