Commodity prices changing agribusiness facilities

With the world demanding more grain and the United States demanding more biofuels, this nation’s rural landscape and infrastructure are being transformed.

With the world demanding more grain and the United States demanding more biofuels, this nation’s rural landscape and infrastructure are being transformed. Jeffrey Berg explained just how dramatic the changes are at the recent American Society of Farm Managers and Rural Appraisers annual meeting in San Antonio, where he was named the organization’s “2008 Appraisal Specialist of the Year.”

For the last 15 years, Berg’s Minnesota-based agriculture appraisal company, Crown Appraisals, Inc., has increasingly specialized in grain elevators, fertilizer, agronomic facilities, seed-cleaning facilities and machinery. As a result, Berg has seen the shifts and choices agribusiness has made, or been forced into, up close.

Shuttle-loader elevators

Shuttle-loader elevators are usually capable of loading 100 to 110 railcars within 15 to 18 hours. They became very popular in the 1990s.

“Lots of shuttle-loader elevators were constructed across the United States for the purpose of loading 100-car trains and sending them to the Pacific Northwest, the Gulf, or one of the feed areas of the country — taking Midwest corn to the feed yards further west,” said Berg, a former farmer.

The whole object of the game with these is to “load a train quickly — get in, get out. It’s very expensive for railroads to have their locomotive equipment sitting around doing nothing. The only time they’re making money is when that equipment is rolling; hauling stuff they can charge for.”

The shuttle-loader elevators are high-speed loading and receiving facilities. Many have two, or three, truck receiving driveways. Some can receive anywhere from 20,000 to 80,000 or 100,000 bushels per hour.

“There’s huge capacity. The problem with them is they all have limited storage capacities. They’re designed to handle a minimum of 10 million to 12 million bushels per year. Originally, when they were constructed, most had only about 1 million bushels worth of storage. So they had to roll that inventory — turn it — 10 or 12 times per year.”

A 100-car train carries about 400,000 bushels of grain. That means a 1-million bushel facility holds about 2.5 trainloads. That doesn’t provide the elevators much wiggle-room “to move grain around or to respond to unfavorable shipping” conditions.

“They just don’t have enough storage capacity. We’ve seen shuttle-loaders all over the country at standing capacity for the last few years.”

Small country elevators

Back when all the shuttle-loaders were being constructed, conventional wisdom was the small country elevators would go away, that they were dinosaurs “and within 10 years they’d all be broke and gone.” However, no one really thought about harvest-time pressures — “with grain rolling in off combines that had to have a home. And in many areas of the country, farmers don’t have enough storage on-farm to handle their crops.”

That opened up an opportunity for the small country elevators.

“They (take in and store) the grain and, as the shuttle-loaders need it, the small elevators ship it over.”

The same thing has happened with the ethanol industry. Most ethanol facilities are built with enough storage capacity for two to six weeks of processing, said Berg. “They can’t afford to go empty and must have a continual supply of corn, day-in and day-out.

“A lot of ethanol plants have made storage agreements with small country elevators to originate grain at harvest-time for the ethanol plant. Often, the elevator buys the grain from the farmer and the plant buys it from the elevator on the same day. There are lots of agreements like that. That way, the small elevators can earn from storage and from in-and-out fees for grain handling.”

The ethanol plants use the small country elevators as surge bins, “ensuring there are X number of bushels — hundreds of thousands — waiting to come to their facilities.”

The burgeoning number of ethanol facilities has dramatically changed the complexion of the grain industry. As they were constructed across the Midwest, managers “became increasingly nervous. Why? Because all of the sudden, all the grain produced doesn’t have to be shipped to the Pacific Northwest or Gulf Coast for export. Suddenly, a lot of grain was being processed locally, within 30 to 50 miles of the shuttle-loaders.”

The need for shuttle-loaders lessened because grain was being stored until it was needed by the ethanol plants. And that grain was just trucked over — “there’s no need to rail grain 30 miles. The shuttle-loaders began to feel they were the endangered species.”

That meant a lot of competition between the ethanol plants and large grain elevators.

Berg said North Dakota has three operating ethanol plants, and two more soon will be. Those five plants, “combined, will consume twice as much corn as North Dakota produces.

“There’s an ethanol plant in western North Dakota where there isn’t enough corn raised — it’s too dry to grow it — to run the plant for a month. I asked the manager where all the corn will come from. He said, ‘We’ve got a deal with the railroad. They’ll haul it from around Sioux Falls, southwestern Minnesota and northeastern Iowa.’”

What about all the ethanol plants already there that can buy that corn locally?

Berg was told, “‘Oh, well, we’ve got a good deal with the railroad and we’ll get the corn.’”

The thing giving that particular plant an edge: “Even though it must compete for corn all the way down in the Corn Belt and haul it up, a lot of its DDGs (distilled dried grains) are being fed locally. There is a huge livestock industry in that area (of North Dakota). And some of the DDGs don’t even have to be dried — they can be fed wet, right there. That saves a lot of energy.”

Storage a must

This is an important point, said Berg: shuttle-loaders found that because they had only small storage capacity, farmers could fill them in only three or four days. “If they didn’t have trains everyday loading grain out, they overflowed. They had to figure out how to originate more grain.”

During wheat harvest, “I spoke with the manager of a very large shuttle-loading facility. A farmer out west of the elevator had … six combines attacking 1,800 or 1,900 acres of wheat, which was yielding about 60 bushels. He had 10 semis and a couple of grain carts, trying to keep the grain away from the six combines.”

Unloading at a rate of 40,000 bushels per hour, the shuttle-loader had a 45-minute waiting line.

That farmer’s trucks “drove right past the shuttle-loader to a little wood-crib elevator 3 miles down the road. There, the grain could be dumped immediately and paid 6 cents per bushel less.

“That’s a clear demonstration of how important it is not to have waiting lines at harvest. When farmers want to deliver grain, you’d better be able to handle it.”

In terms of combining capacity, the farmer can’t afford to shut the combines down — custom operators, or not. “A lot of these combines are being pushed to the maximum and every second of good harvest weather must be utilized.”

What happens in the winter when that grain needs to move to market? “If you’re the only elevator in the marketplace, the grain will eventually flow to you. But if there are three ethanol plants competing for that same grain, when the farmer gets loaded up, he’ll drive right past your facility unless you outbid the ethanol plant.

“That’s what is happening. The elevators are finding they must originate the grain whenever the farmer wants to deliver it.”

Typically, “we’ve seen storage facilities cash-leasing for 10 cents per bushel, per year. It then jumped to 12 cents. Now, it’s up at 18 or 20 cents for one-time storage capacity.”

Drying capacity is another concern with increased corn acres, especially in the top half of the country. “When you get into northern climates in a year like this one — about 250 heat units short — the corn is coming out of the field at 23 to 30 percent moisture. That takes a lot of drying.”

Many of the big shuttle-loaders have been forced to put in 5,000- to 10,000-bushel-per-hour dryers. “That’s something they must do to keep the grain coming to them.”