Economics of Owning and Operating Corn Drying and Storing Systems Wrth Rising Energy Prices

Transcription

1

2 Table Of Contents Page Introduction.... Nature and Extent of Study High Temperature Systems Low Temperature Systems... Hybrid Systems Analytical Model and Assumptions Analytical Results Case Farm with 0,000 Bushels... 0 Case Farm with 0,000 Bushels... 0 Case Farm with 0,000 Bushels... Case Farm with 60,000 Bushels... Case Farm with 80,000 Bushels to 00,000 Bushels Inclusive... Case Farm with 00,000 Bushels... Anticipating Need for a Larger System in the Future... Anticipating Future Expansion to 60,000 Bushels... Anticipating Increasing Capacity from 60,000 to 00,000 Bushels or More... Conclusions... References... Appendix A: Detailed Cost Budgets for Drying and Storing Systems... AppendixB: Methods Used to Calculate. Appendix C: Least Cost Ordering of Drying and Storage Systems Categorized by Case Farm Size and Under "Modest," "Signifi cant," and "Drastic" Energy Price Increases and Two General Rates of Inflation... 7 Appendix D: Ordering of Drying and Storage Systems on the Basis of Average Annual Energy, Categorized by Case Farm Size and Under "Modest," "Significant," and "Drastic" Energy Price Increases and Two General Rates of Inflation... 7 Authors: Harald R. Jensen and Vernon R. Eidman are professors and Jeffrey P. Madsen is a graduate research assistant in the Department of Agricultural and Applied Economics, University of Minnesota. The University of Minnesota is committed to the policy that all persons shall have equal access to its programs, facilities, and employment without regard to race, creed, color, sex, national origin, or handicap.

3 Economics of Owning and Operating Corn Drying and Storing Systems Wrth Rising Energy Prices Introduction Many Minnesota farmers can remember when corn was field-dried, picked with mechanical cornpickers and stored as ear corn on the farm. The advent of the picker-sheller and increases in cash corn production greatly hastened the need for artificial drying. Initially most of the drying was done at the local elevators, but widespread farmer adoption of high-speed harvesting equipment resulted in long lines oftrailers and trucks with high moisture corn at the elevators. Farmer waiting costs increased sharply and many farmers bought their own drying equipment. Thus, farmer adoption of high-speed, large capacity harvesting systems, the inability of the local elevator and the transport system to handle the large grain supplies at harvest without farmer delays, along with relatively inexpensive fuels for corn drying have been important reasons why many corn producers now have their own drying systems. But other factors also have provided an incentive for early corn harvesting and artificial drying. This report has been done as part of a larger study on "An Economic Analysis of Minnesota Farm Adjustments to Increasing Energy Prices," Minnesota Agricultural Experiment Station, Project -09. The authors wish to acknowledge the cooperative efforts of Harold Kramer, Rollie Messner, Dale Rossing, and Jack Botz of Butler Manufacturing Company, who provided their time and expertise in helping us specify and price the component parts of the corn drying systems included in this study. They also wish to acknowledge the technical assistance of R. V. Morey and H. A. Cloud, professors, Agricultural Engineering Department, University of Minnesota, and the computer services made available to us by the University Computing Center. Early harvesting of soybeans and corn makes it possible to complete fall plowing so as to assure more timely field operations in the spring, and to take advantage of yield increases associated with fall over spring plowing on the heavy silt loams of the northern Corn Belt. Moreover, early fall harvesting reduces the risk of unfavorable weather for corn harvesting and fall plowing and decreases field losses from harvesting drier corn. A relatively large part of the total fossil fuel energy used in corn production is consumed in drying the grain. With reference to typical field and drying operations for corn, Shove () notes, "that two to three times as much energy is expended in the drying process compared to total energy use of all other field operations." Energy costs have risen sharply over the past four to five years and further increases are expected in the future. Some methods of drying grain require less LP gas than others, but generally they also require more electricity and a more careful control of the drying and storing process. The objective of this study is to examine the effects of increasing energy prices over time on grain drying costs. With consideration for these effects, this study was undertaken to determine the least cost method or system for drying and storing various volumes of shelled corn. Nature And Extent Of Study The essential character of this study is an analysis of cases. Seven case farm situations were developed based on the number of bushels of corn harvested per day, and on the total number of bushels harvested each season (Table ). The corn drying, handling and storage systems were designed so as to provide ample time for fall plowing and to minimize field losses from delayed harvesting. Hence, design of the corn drying, handling, and storage methods considered both the total amount of corn to be dried, handled, and stored, and the daily rate at which the corn is harvested.

4 Table. Case Farm Situations. Case Acres of corn Bushels of corn Size of Bushels harvested Number of number harvested annually harvested corn per 0-hour day harvest annually combine days 00 0,000 -row (6"), ,000 -row (6"), ,000 -row (6"), ,000 -row (6"), ,000 6-row (0"),900 6,000 00,000 8-row (0"),700 7,000 00,000, 8-row (0") 9,00 This study does not extend to all drying methods and farming practices that relate to attaining storable corn. For example, solar drying was not included since this method is still in the experimental stage. Alternative planting and harvesting dates can influence the amount of artificial drying that is required as can planting of varieties with different maturity dates. None of these alternatives were included in this study on energy, but plans are to consider them in another phase of the research project. This study is limited to an analysis of those systems that are widely used and have been used for some time, as well as some that are of rather recent origin, but utilize known and well-established technologies. The study assumes that a grain storage and drying system must have the capacity to handle a crop harvested within field days and to reduce grain moisture by 9 to 0 percent. The drying methods included in this study can be grouped into three general classes. These are: () high temperature systems that rely on relatively large amounts of fossil fuel; () low temperature systems that rely on electricity to power the aeration fans and to provide supplemental heat; and () hybrid systems that combine both high and low temperature methods. High Temperature Systems The three high temperature systems analyzed in this study are continuous flow, automatic batch and in-bin-batch. The continuous flow and automatic batch systems are very much alike in many respects. Both require wet corn holding capacity prior to drying. Both are high speed, high capacity and automatically move wet corn into the drying chamber and dried corn out. Hence, both require a minimum amount of supervision. Air flow rates run relatively high for both, ranging from 0 to 0 dm per bushel. These high air flow rates are needed to attain high drying capacity and acceptable grain quality at temperatures ranging from about 66 to 0C (0 to 0 F). The high air flow rates account for the relatively low drying efficiency (bushels/gallon of LP gas) of these two systems. The relatively fast drying and cooling of these systems also result in considerable kernel stress. 'See Heid, Walter G. Jr.. "The Performance and Economic Feasibility of Solar Grain Drying Systems," Agricultural Economics Report No. 96, ESCS, USDA. February With the in-bin-batch drying method, corn is loaded into a bin within a period of to 0 hours, dried rapidly with a relatively high heat of 9 to 60 C (0 to 0 F), and air flow rates of to 0 dm per bushel, removed, and placed in a storage bin. The bushels of corn dried in one batch is usually the volume of corn harvested in one day. Since the corn is not continuously moving through a drying chamber and because relatively high drying temperatures are used, each batch dries unevenly, I:e., corn in the lower levels dries before corn in the upper levels, unless the grain is stirred and mixed. Therefore, to reduce the managerial services required to operate this system, a device for stirring and mixing the grain was included as an integral part of this system. The cooling and mixing of the corn that takes place as it is unloaded into storage also helps to equalize the moisture in the batch. The advantages of the high temperature in-bin-batch drying system are that the investment costs are modest, its drying efficiency (bushelslgallon of LP gas) is relatively high, and it has comparatively high capacity. On the other hand, since the system is not fully automatic, additional management and labor are required to check grain moisture content periodically during the entire drying process and to transfer the grain from the drying to the storage bin. Low Temperature Systems The low temperature-in-bin electric system combines the drying and storage functions. Low temperature drying is a method of reducing moisture content to the desired level over an extended period of time, usually several weeks. McFate (6) defines low temperature drying as drying corn with percent or less moisture at a time when average daily temperatures are 0 C (0Of) or less, using just enough heat to raise the drying air temperature.8 to.6oc ( to 0 F). Holmes and Lipper (), on the other hand, distinguish between low temperature and very low temperature dryers. They define low temperature systems as those that use enough heat to raise the air temperature. to. C(0 to 0 F) before it enters the grain. Very low temperature systems are defined as systems that use enough heat to raise the air temperature just enough to assure that ambient air humidity is low enough to reduce grain moisture to a safe storage level. To arrive at this level, the air temperature usu

5 ally has to be increased.8" to. C ( to 8 F) before it enters the grain. The objective of very low temperature drying is to save energy by making maximum use of the natural drying ability of atmospheric air. Both low and very low temperature drying systems are batch processes where the corn is dried in storage bins. This means that each storage bin has a perforated floor, plenum chamber, fan, an auxiliary heater (usually electric), and a grain distributor. Low temperature drying is a simple method of producing high quality corn - corn with a minimum of mechanical damage and stress-cracked kernels. At the same time, it has a slow drying rate. It works best with favorable weather and in this study is limited to incoming corn with percent or less moisture. Hybrid Systems Recent developments in drying methods have given rise to hybrid systems that combine high and low temperature systems. The first hybrid system is dryeration in which the corn is discharged hot from a high temperature dryer at a moisture content from 6 to 7 percent to a bin where it steeps for 8 to 0 hours, then is cooled with an air flow rate of approximately cfm per bushel, and transferred to storage. Steeping increases the efficiency of moisture removal during cooling because it works to equalize the moisture in the kernels. Steeping also reduces the risk of stress cracking of the kernels while cooling. The second hybrid system is the high temperature-low temperature system, where the corn is discharged from a high temperature dryer while it is hot and at a moisture content of about percent into a drying bin where it is cooled. In this cooling process corn moisture content is reduced approximately percent. The drying then is completed with low temperature methods using either natural air or air heated to increase its temperature a few degrees above the natural air. Recommended air flow for the low temperature phase is from to cfm per bushel, depending on the moisture content of the incoming corn. Both combination high temperature-low temperature and dryeration systems not only produce dried corn of high quality, but also significantly increase the capacity of the high temperature dryer. Grain can be discharged from the high temperature dryer at a higher moisture content than the desired final moisture content. Reducing the length of time the corn needs to be in the high temperature dryer not only increases the capacity of the high temperature dryer, but saves LP gas. These systems, however, do require additional investment in drying floors, fans, and handling equipment. The specific corn drying systems analyzed in this study (see Appendix A for detailed budgets) are outlined in Table. Earlier we pointed out that optimal design of corn drying, handling, and storage sys- Table. Alternative Corn Drying Systems Analyzed in Relation to Bushels Harvested Per Day and to Total Bushels Harvested and Stored Per Season (See Appendix A for detailed budgets of the systems). Drying and storing systems Bushels to be dried (000's of bushels) 0' 0' 0' Without With bucket bucket elevator elevator High temperature- X X X X X X X X continuous flow High temperature- X X X X automatic batch High temperature- X X X X batch-in-bin Low temperature- X X X X in-bin Combination high/low temperature- X X X X X X X X continuous flow Combination high/low temperature- X X X X X X X X automatic batch Dryeration- X X X X X X X X continuous flow Dryeration- X X X X X X X X automatic batch 'Systems in the 0-0 range do not have bucket elevators. 'Each system checked in the 80,000 bushel case size was analyzed with and without a bucket elevator. 'Systems in the range have bucket elevators only. tems requires consideration of the total amount of corn to be harvested and dried each season and the daily rate at which the corn is harvested. Earlier we also noted that the essential character of this study was an analysis of seven case farm situations based on total bushels of corn harvested each season and on bushels of corn harvested per day (Table ). Table relates each drying system to total bushels of corn harvested and dried. An "x" in the table means that the drying system, and the associated. storage facilities have the capacity to handle the bushels to be harvested and dried for that case farm situation. Conversely, the absence of an "X" signifies that the drying system does not have the capacity to handle that case farm situation. Analytical Model And Assumptions The analytical model chosen for this study focuses on the unit costs of drying and storing corn under alternative systems or methods. The model is designed to answer the question: which is the least cost method or system for drying and storing shelled corn for various volumes of corn dried and stored? More specifically it is designed to answer the questions: with a given number of bushels of

6 corn to dry and store, which is the least reel cost method or system under conditions of general inflation and rising energy prices? Also, which is likely to be the least real cost system for drying and storing corn, given the expectations of an expanding farming operation with more corn to dry and store and that general inflation and rising energy prices will prevail? Before the average cost per bushel for a given system can be determined, all the relevant cash outflows or cash costs associated with owning and operating a system must be identified and estimated. Further, since drying and storage facilities are relatively large, long-term capital items for on-farm use, the cash outflows of owning, as well as of operating the system, must be considered over the useful life of the investment. In addition, consideration must be given to the effect that general inflation and rising energy prices will have on the ownership and operating costs during the investment's lifetime. A time span of 0 years was selected as the period of analysis for the model. This length of time coincides with the expected useful life of the largest and most durable components of each of the drying and storage systems (i.e. metal storage bins, concrete bases, wet holding tanks). In addition, the model assumes that the acquisition of a system will require the purchaser to finance the investment over the same period of 0 years. The model estimates the annual net cash outflows associated with owning and operating each system for each of the 0 years. The annual cash outflows of ownership considered within the model are: ) the annual finance payment, which reflects both the principal and the interest cost necessitated by having financed the purchase of the system; ) the annual insurance premium; and ) the increase in realty tax associated with the purchase of the bins and other permanent fixtures. The down payment for the system, also a cash outflow of ownership, is assumed to be paid prior to the 0-year analysis period. The model assumes that the purchaser is acquiring an entire drying and storage system for a specific case farm situation. Cases in which previous investments exist in drying and storage facilities are not considered:' The investment in on-farm drying and storage facilities, and the accompanying financing of such an investment, also affects the income tax paid by the purchaser. The annual depreciation, the additions to the realty tax, and annual interest cost of financing the system are deductions from the purchaser's taxable income. After appropriate adjustment for the purchaser's income tax bracket, these items are subtracted from the yearly cash outflows associated with each system within the model. Since some mechanical components of each drying and storage system have durable life spans of only halfthe period of analysis, i.e., 0 years, cash outflows for the replacement components are included in analyzing the system. s The annual cash outflows of replacing these components is a 0 percent down payment with the remaining balance prorated annually over the second 0-year period. The final aspect of cash outflows associated with ownership that are considered within the model is the impact of the investment tax credit on the purchaser's income tax. It is assumed that the credit will be a straight-forward reduction in the amount of income tax paid by the purchaser. As such, the amount of the credit is subtracted from the annual cash outflows of ownership for the year in which it is received (i.e. the first and eleventh years). Not included in the model are the costs of the value of the land upon which the drying and storage system is constructed. Thus the model implicitly assumes that sufficient idle land exists in each case farm situation so that no sacrifice in earnings from land is required for a system's construction. s Appendix B details the specific calculations involved with each of the cash outflows of ownership discussed above. The yearly cash operating costs considered within the model are: ) the cost of propane (considered for all systems with the exception of the low temperature in-bin system); ) the cost of elecjricity; and ) the cost of repairs. Since operating costs arise because the system is used, as opposed to being acquired, some preliminary assumptions are made about the circumstances under which the drying and storing operations are performed. The drying operations within the model are assumed to be taking place under so-called normal conditions, that is, approximately 00C (0Of) ambient air temperature and 70 percent relative humidity. The corn to be dried is assumed to contain an average harvest moisture content of percent dur IRe. cost in this context refers to costs expressed in base year (977 prices. 'Initially. all capital components within each system must be specified and priced. In drawing up the budgets for each system (set forth in Appendix A), the authors used manufacturer's suggested retail prices for all capital items. We fully acknowledge that purchasers of drying and storage equipment are often able to obtain a discount off the manufacturer's suggested retail price on certain capital items. The magnitude of the discount typically depends upon e particular dealership's locale, inventory, and anticipated sales volume. Preferences by a purchaser for a specific brand name and the time of year the purchase is being made are also factors which can affect the actual price paid for drying and storage equipment. Since conditions in different regions of the state, and even conditions between dealerships within a region, can vary widely, the authors chose to use a manufacturer's sugqested retail prices so that the relative prices of capital items within a given system (and between systems) remained consistent throughout the study. 'This assumption limits, somewhat, the applicability of the model's results. However, the model's results are used to make recommendations in the case of an owner who wishes to modify his system or expand the capacity of his drying and storage e9uipment. This matter is taken up in the last section, "Analytical Results: 'Conceptually, the model views the cost of replacing component parts as integral to the cash outflows of owning II specific drying and storage system. Repair costs are a separate category considered under operating costs. "Both the low temperature in-bin and combination high-low temperature systems require relatively shallow grain depths. Storage bins for these systems have low eve heights, large diameter bases, and, hence, can cover large areas of land. Particularly for large grain volumes, these systems may stretch this assumption of sufficient idle land. 6

7 ing each of the 0 years considered. 7 Thus, the drying operation is removing approximately 0 percentage points of moisture from the harvested corn. The storage operations within the model are assumed to take place over a seven-month period (November to May inclusive). This assumption generally corresponds to a cycle in which corn is harvested in the fall and stored for spring marketing. Within the seven-month period, operation of the aeration fans is required for a "cooling down" phase prior to the onset of winter temperatures and a "warming up" phase when milder spring weather arrives. Each phase requires the operation of the fans continuously for one week. In addition, the aeration fans are assumed to be operated intermittently for a total of 6 hours during each of the three months between the cooling and warming phases. The yearly propane costs are estimated on the basis of the quantity of propane required by a specific drying system. The quantity of propane required by a given system is determined by the volume of grain to be dried and the amount of moisture removed under high temperature conditions during drying. The yearly electricity costs are estimated on the basis of the size of the electric motors contained within a system and the length of time the various motors are operated. In addition to the operation of grain handling equipment (i.e., augers and bucket elevators), and the operation of aeration fans, the length of time that the self-enclosed high temperature dryers are operated is considered. Total repair costs over each component's useful life are estimated as a percentage of the purchase price of the various components within the system. The total repair costs of components in various categories are pro-rated over the years of life, summed over all components, and included as a yearly operating cost for the system. No accounting is made within the model for the labor time required by the different systems. The authors fully acknowledge that there are variations in labor time and management expertise needed to operate the various systems. However, estimates of labor and management requirements in sufficient detail to make a meaningful contribution to the analysis were not available at the time of this study. Appendix B also details the specific calculations involved with each of the cash operating costs discussed above. The market rate of interest for financing the investment and the percentage of the purchase price required as a down payment were parameters given to the model. The investor's tax bracket also TAn exception was made for the low temperature in-bin system. Since Shove (0) recommends a percent maximum moisture content before spoilage risks become excessive. it was assumed that this was the averaile harvest moisture content of corn dried by this system. The percent difference in initial moisture content is considered relatively insignificant for purposes of comparisons with the other systems. was a parameter given to the model, which was constructed so that it uniformly adjusted the amount of the interest cost, realty tax, and depreciation deducted from the annual cash outflows. Another parameter of the analysis was the percentage of investment tax credit resulting from the purchase of grain drying and storing facilities. The calculation of all costs within the model was based upon the 977 prices obtained by the authors. These prices include both the current cost of drying and storage equipment and the current cost of propane and electricity. Since the model projects costs over 0 years, the use of 977 prices over the entire period would certainly be naive. In order to overcome this, three separate price escalators are incorporated into the model. The price escalators are: } the general rate of inflation (intended to account for the rate of price changes of all drying and storage items within the model); ) the rate of propane price increase; and ) the rate of electricity price increase. In each case the price escalator is a constant percentage from year to year. Thus, all costs within the model can be divided into four broad categories: ) costs that are not directly influenced by inflation since they are based on prices that are negotiated at a specific time and do not change in the years following the negotiation; ) costs that are subject to increases due to the effect of inflation; ) costs that are subject to yearly changes due to the effect of increasing electric prices; and ) costs that are subject to yearly changes due to the effect of increasing propane prices. Table summarizes the cost items in each category. Table. Cost Items for Each Cost category in the Analytical Model. Category category Category Category Initial down payment Down payment for Electricity Propane Finance payments replacement parts Realty tax payments Insurance premiums Income tax deductions Repair costs For any given year k, the total cost of a given system for that year is the sum of the costs in these four categories. Algebraically, this is represented as: C~=C~+CHct+C: where q=cost in category j for year k. in Category are not directly influenced by inflation and are expressed in 977 prices. in Category for year k can be expressed as q { +f)k, which corresponds to the costs in Category expressed in 977 prices times the appropriate inflation factor for the kth year. In an analogous fashion, the costs in Categories and for the kth year can be expressed respectively as q { +e)k and q ( +p)k, which correspond to the cost of electricity and propane in 977 prices times the appropriate 7

8 price escalator for electricity and propane for the kth year. Thus, using 977 prices, we can express the total nominal cost in the kth year as: NC~+ q+q ( +f)k +C ( +e)k+cg ( +p)k The model calculates the cost for each year in nominal dollars (dollars actually required to be paid in that year). The summation of these costs over the 0 years results in a total cost expressed in nominal dollars. Dividing this total (nominal) cost by 0 to arrive at an average annual cost for a system and then comparing systems on the basis of this average annual cost would be misleading, however. Since the model tacitly assumes that the dollar is declining in value throughout the period of analysis, the nominal costs for each year are discounted for inflation in that year to arrive at the real dollar cost in that year. In the kth year the costs in Category, q, are divided by ( +f)k, the inflation factor for year k. Thus, the real cost of items whose prices are negotiated at a specific time, (i.e. prior to the acquisition of the drying and storing system) and subsequently paid for in equal yearly installments, declines throughout the period of analysis. When the costs in Category for the kth year are discounted for inflation, the quantity C~ ( +f)k is divided by ( +f)k leaving C~. Thus, all costs within the model for drying and storage equipment which are subject only to inflationary price pressures are considered on the basis of their 977 prices. When the costs in Category and are discounted for inflation in the kth year, the quantities q ( +e)k and q ( +p)k are divided by ( +f)k resulting (+e)k (+p)k in C--and C respectively. Thus (+f)k ( +f)k, the cost within the model for electricity and propane are escalated on the basis of their price increases in excess of inflation. These price increases in excess of inflation can be viewed as the increasing scarcity prices of electricity and propane, or more appropriately, for electricity, the increasing scarcity prices of the fuels used in its production. The real dollar costs for year k are expressed algebraically as the nominal costs divided by the inflationfactor for year k: RCT= Nq = ~+C~C (He)k +C (Hp)k k (Hj)k (Hj)k (Hj)k 0 (Hi)k When the real dollar costs for each year, Rq, are summed over the 0 years, an annual average cost in real dollars is then determined. It is this real annual average cost which is used as the basis of comparison between drying and storage systems within the model. The model requires selection of values for its parameters prior to a rank-order analysis of the various drying and storage systems. The authors selected an interest rate of 9 percent and a down payment requirement of 0 percent of the initial purchase price of a system as representative of the conditions currently prevailing in the credit market. The authors further specified the investment tax credit as 0 percent of the total investment, as this corresponds to the percentage credit under current tax laws. An income tax bracket of percent was selected as generally representative of the case farms under consideration. 8 The selection of values for the model's price escalators was a more difficult task because current and historical information about the rate of price changes for propane and electricity is only of limited use in projecting future rates of change. 9 The selection of a single value for each of the price escalators was deemed inappropriate by the authors since this procedure tacitly assumes perfect knowledge about the behavior of future prices. As a result, the authors chose to test the sensitivity of the least cost method to future energy prices by considering three broad scenarios: () that of a "modest" annual percentage price increase; () a "significant" annual percentage price increase; or () a "drastic" annual percentage price increase. Within each scenario two general rates of inflation ( and 7 percent) were selected. For each inflation rate "appropriate" price escalators for propane and electricity were then chosen. Thus, the total number of price configurations chosen for the analysis was six. These six are summarized by their scenario category in Table below. Table. Alternative Energy Price Increase Scenarios with Given Rates of Inflation. Rate of general inflation Modest Significant Drastic Rate of electric price increase'o Rate of propane price increase'o The "modest" change energy scenario is characterized by rates of electric and propane price increases of only one and two percentage points, respectively, above the rate of inflation. An inflation rate of percent means that the general price level in the economy doubles in approximately Yz years, while the prices of electricity and propane 'The rank order analysis was also performed with a 0 percent tax bracket (all other parameters remaining unchanged). Since this alteration of the tax bracket alone did not affect the selection of the least-cost drying and storage system, the authors have chosen to report only the optimal selections resulting from the use of a percent tax bracket. FM 0 In come Tax Management for Minnesota Farmers, E. Fuller, Agricultural Extension Service, University of Minnesota, November, 977, suggests that a 0 to percent tax bracket is applicable to a wide range of farms. Sig nificantly higher or lower tax brackets may of course, alter the optimal selection of a system. 'Following the oil embargo of 97, the price of propane increased sharply. The price of electricity followed the price of propane but at a somewhat slower rate. These relatively abrupt changes in past prices add greatly to the difficulty of making future projections. "'The 977 base prices for propane and electricity used in this study were 6.9' per gallon for propane and for electricity, $.0 for the first 0 KWH,. '/KWH for - 00 KWH and.6 '/KWH for 0 or more KWH each month. B

9 double in approximately and 0Y years, respectively. An inflation rate of 7 percent means that the general price level doubles in approximately 0Y years, while the prices of electricity and propane double in approximately 9 and a years, respectively. In either case, these rates of price changes over 0 years give rise to a real increase in the price of electricity of approximately percent and a real increase in the price of propane of approximately percent. The "significant" change energy scenario is characterized by rates of electric and propane price increases of two and five percentage points, respectively, above the rate of inflation. For the percent inflation case, electricity prices double in 0Y years and propane prices double in 7Y years. For either set of price changes over 0 years, the real price of electricity rises by approximately percent and the real price of propane rises by approximately percent. The "drastic" change energy scenario is characterized by an annual electricity price increase of 0 percent and an annual propane price increase of percent, regardless of the rate of inflation. This scenario uniformly assumes that electricity prices will double in 7Y years and propane prices will double in years. For an inflation rate of percent, real electricity prices rise by percent and real propane prices rise by 7 percent over the model's 0 year time horizon. A 7 percent rate of inflation gives rise to a real electricity price increase of 7 percent and a real propane price increase of percent. In each energy scenario the annual rate of propane price increase exceeds the annual rate of electricity price increase. The excess is one, three, and five percentage points for the "modest," "signifieant," and "drastic" scenarios, respectively. The incorporation of these differences into the analysis reflects the author's judgment that the price of propane will rise faster than the price of electricity. We envision this because the possibility of substituting domestically plentiful fuels in generating electricity may dampen upward price pressures on electricity. No such dampening effect, with the exception of government control, can be envisioned for propane prices. Analytical Results Table lists the capital investment [initial and replacement ( )], gallons of LP gas, and kilowatt hours of electricity per bushel for the various drying and "In observing Tables and 6 in this section, the reader should keep in mind that for the smeller cese fann situations. the continuous flow and automatic batch dryers are oversized, resulting in relatively high owning and operating costs for these cases. A single manufacturer of machinery and equipment seldom makes the wide range of models that are exactly tailored to all capacity requirements. In this study we may have been able to overcome this problem by obtaining data on components of systems and prices from several manufacturers. But this approach would have given rise to other more critical problems, such as maintaining consistency in pricing the component parts of each system. This consistency is very important in making valid comparisons of systems. storing systems and case farm situations. Looking across the columns, we note some very significant economies to size as the overhead investment in drying and storing facilities for each of the systems is spread over more bushels. For example, investment costs per bushel for the high temperature-continuous flow system (without bucket elevator) decrease from $. for a 0,OOO-bushel case farm to $.9 for an ao,ooo-bushel case farm. The table also shows that mandatory replacement investment (itf;lms worn out after 0 years, such as dryers, fans, electric motors) becomes a smaller percent of the initial investment with larger and larger systems. The reason is that bins, which are not replacement items within the 0-year period considered, are a larger percentage of the investment cost for the larger systems. In considering the trade-offs between capital investment costs and energy use when choosing a system, we need to consider not only the initial capital investment costs, but also the investment cost of the capital items that must be replaced to give years of service equal to those items, such as bins, with a longer service life expectancy. To illustrate: for a 0,000 case farm situation, consideration of initial investment capital costs in relation to energy use suggests that the high temperature continuous flow system has lower initial investment costs, but higher energy use than the dryeration continuous flow system. However, when mandatory replacement investment costs are added to the initial investment cost, the investment costs per bushel are the same for the two systems, but the energy use is lower for the dryeration system. Thus, a wrong decision can be made by considering only initial investment costs in trade-offs. Table does show some of the trade-offs that are important in determining a least cost system. For instance, choice of a combination high-low temperature system over a high temperature system means that additional capital investment and electricity use are offset by reduced LP gas use. Similarly, choice of a dryeration system over a combination high-low temperature system means that the reduction in capital investment and electricity use is offset by increased LP gas use. Whenever trade-offs like these exist, the least cost system depends on the substitution rates and on the relative prices of the various substitutes. The trade-offs observed in Table are reflected in the costs per bushel in Table 6. Table 6 lists the real average annual 'costs per bushel for the lowest cost drying and storage system(s) for each case farm situation in each of the six sets of energy price and inflationary conditions. For comparative purposes, a minimum of two systems is always listed for specific situations., In instances where more than two are listed the authors chose to do so because the cost differences were very small or because all the systems listed were thought to be worthy of potential 9

10 Table. Capital (Initial and Replacement), Gallons of LP Gas and Kilowatt Hours of Electricity Per Bushel for Alternative Drying and Storing Systems and Case Farm Situations ( are Based on 977 PrleAltl. Case farm Drying situations 0,000 bu. 0,000 bu. 0,000 bu. 60,000 bu. 80,000 bu. 00,000 bu. 00,000 bu. and Without With storing Without With bucket bucket elevator elevator elevator elevator High temperature continuous flow High temperature automatic batch High temperature batch-in-bin low temperature $.60 (.6) $.6 (.89) $. (.6) $.00 (.) $. (.9) $.99 (.0).86 gal..86 gal..86 gal..86 gal..86 gal..86 gal.. kwh.. 0 kwh.. 6 kwh.. 6 kwh..7 kwh.. kwh. $.07 (.) $.9 (.8) $. (.) $.0 (.).86 gal..86 gal..86 gal..86 gal.. 68 kwh..0 kwh.. kwh.. kwh. $. (.) $. (.) $.08 (.6) $.9 (.).8 gal..8 gal.. 8 gal..8 gal.. 7 kwh.. 7 kwh.. kwh..70 kwh. $.0 (.) $.88 (.) $.6 (.8) $. (.) kwh..88 kwh..97 kwh..97 kwh. $. (.7) $. (.) $.7 (.0).86 gal..86 gal..86 gal.. kwh..7 kwh..7 kwh. Combination $.60 (.8) $. (.00) $.8 (.7) $.7 (.9) $.99 (.8) $.8 (.) $.8 (.) $.7 (.8) $.6 (.) highllow temperature continuous flow.08 gal.. 99 kwh..08 gal..99 kwh..08 gal.. kwh..08 gal.. kwh..08 gal.. kwh..08 gal.. kwh..08 gal. kwh..08 gal.. kwh..08 gal.. kwh. Combintaion $.0 (.8) $. (.7) $.68 (.) $.9 (.) $.90 (.9) $. (.) $.9 (.) $.8 (.8) $.69 (.) high/low temperature.08 gal..08 gal..08 gal..08 gal..08 gal..08 gal..08 gal..08 gal..08 gal. automatic batch.00 kwh..00 kwh..7 kwh.. kwh..6 kwh.. kwh.. kwh.. kwh..6 kwh. Dryeration $.7 (.8) $.7 (.8) $. (.) $.0 (.) $.6 (.9) $.96 (.) $.9 (.9) $. (.6t $.0 (.9) continuous flow.8 gal..8 gal..8 gal..8 gal..8 gal..8 gal..8 gal..8 gal..8 gal..08 kwh.. kwh.. kwh..6 kwh.. kwh..06 kwh..0 kwh..7 kwh..9 kwh. Dryeration $. (.96) $.0 (.7) $. (.) $.0 (.) $.6 (.9) $.00 (.) $. (.0) $.7 (.) $.0 (.7) automatic batch.8 gal..8 gal..8 gal..8 gal..8 gal..8 gal..8 gal..8 gal..8 gal..08 kwh..9 kwh.. kwh..6 kwh..0 kwh.. kwh..0 kwh..6 kwh..6 kwh. consideration. Examination of the table reveals that lower per bushel costs are associated with the higher rate of inflation. The reason of course, is that the real per bushel cost was determined by discounting for inflation. Thus, the expression (+f) in the denominator is larger for the higher inflation rate resulting in real lower per bushel costs. Appendix C lists the real average annual costs per bushel for all eight drying and storage systems from lowest to highest. A similar ordering of all eight systems on the basis of average annual energy costs is given in Appendix D. Case Farm With 0,000 Bushels Regardless of the energy price increases and general inflation rates used in this study, lowest per bushel costs are clearly realized with the low temperature system. To be kept in mind, however, is the general recommendation that the low temperature system is limited to corn with a maximum of percent moisture, although some management practices and favorable climate conditions can raise this maximum. Hence, farmers who plan with consideration for higher moisture corn may want to choose one of the other systems even though the per bushel costs of these systems are higher. Such a choice should be made only after knowing the magnitude of the total cost difference between the systems compared over 0 years. For example, the cents per bushel average difference between the low temperature and batch-in-bin systems, under the "modest" energy price scenario and 7 percent general inflation rate, amounts roughly to $6,000 on approximately 0,000 bushels over 0 years. As energy prices increase, the drying and storage systems that rely on propane become considerably more expensive than the low temperature system. This system's energy cost savings, along with relatively low investment costs, give it a clear cost advantage for this case farm situation over all the other systems considered. Case Farm With 0,000 Bushels With "modest" energy price increases and the lower general inflation rate, the batch-in-bin system is the lowest cost system. For this size operation, this system is favored with a low investment cost per bushel and as long as energy price increases are "modest" and the general inflation rate is no more than percent, it lays claim to the low cost position. But with an increase in the general infla 0

11 Table 6. Real Average Annual (in cents) per Bushel for the Lowest Cost Drying and Storing System(s) for Seven Case Farm Situations Under "Modest," "Slgnificant," and "Drastic" Energy Price Increases in Combination With Two General Rates of Inflation, Assuming a Percent Income Tax Bracket for Each Case Farm. bu.lyr. Modest stored and dried A B A B A B 0,000 Low temp. 6.8 Low temp.. Low temp. 7. Low temp..8 Low temp. 9. Low temp. 6. Batch-In-bin 9.9 Batch-in-bin 8. Dryer-AB. Dryer-AS 0. Combination-AS Dryer-AS 8. Batch-In-bin. Satch-in-bin Dryeration-AS. Combination-AS.9 Satch-In-bin.8 Batch-In-bin.8 Low temp. 6. Low temp..7 Low temp. 8. Low temp.. 0,000 Dryer-AS. Dryer-AS. Dryer-AS 7. Dryer-AS 6. Combination-AS. Combination-AS 8.9 Low temp..6 Low temp.. Batch-In-bin 7. Low temp ,000 Dryer-AS. Dryer-CF. Dryer-AB.6 Dryer-CF. Dryer-AB. Low temp..6 Low temp.. Dryer-AB.6 Low temp. 6.6 Combination-AS 9.6 Low temp..0 Combination-AS 6. Batch-In-bin. Batch-In-bin. Dryer-CF. Dryer-CF. Dryer-AB 0. Dryer-AB 6. Low temp..0 Low temp..8 Dryer-CF.9 Dryer-CF. Dryer-CF.0 Dryer-CF. Low temp. 6. Low temp..7 60,000 wlo Dryer-AB. Dryer AS. Low temp.. Low temp.. Combination-AS ls. Combination-AB.0 Bucket elevator Batch-in-bin. Batch-in-bin.6 Dryer-AB. Dryer-CF.9 Dryer-CF.7 Dryer-CF 6.9 Dryer CF.7 Comblnalion AS. Combination AS 7. 60,000 wlsuckal Dryer AS. Dryer-AS. Dryer-AS 7. Combinalion-AS 6.0 Combination-CF.7 Combinatlon-CF 8. elevator Combinatlort.AS 7. Dryer-AS 6. Dryer-CF. Dryer-CF 0. Dryer CF. Dryer CF.6 Combination CF ls.0 Combination-CF.9 SO.OOO wlo Bucket Dryer-AS. Dryer-AS 0.8 Dryer-AS.6 Dryer-AS.S Combination AB 8. Combination-AS. elevator Dryer-CF. Dryer-CF. Dryer-CF. Dryer-CF. Combinatlon-CF 0.8 Dryer-CF 7. 80,000 wlsuckel Dryer-AS.6 Dryer-AS.6 Dryer-AB.7 Dryer-AB.6 Dryer-CF. Combination-CF 7. elevator Combination-AB ,000 00,000 Dryer-CF.9 Dryer-CF.0 Dryer-CF ls.0 Dryer-CF.0 Combination-CF 0. Combination-CF 6.7 Dryer-AS. Dryer-AS. Dryer-AB. Dryer-AS. Combination-AS 0. Dryer-CF 6.9 Dryer CF 0.8 Combination AB Dryer-CF.7 Dryer-CF 0.9 Dryer-CF.7 Dryer-CF.9 Dryer-CF 9. Dryer CF.8 Dryer-AS.7 Dryer-AS 0.9 Dryer AS.8 Dryer-AS.9 Dryer-AB 9.6 Dryer-AS.8 Combination CF 9.6 Combination-CF 6. Combinalion-AB 0. Combinatlon-AB 6.7 Low-temp.=low temperature. Dryer-AB =Dryeration-automatic batch. Combination-AB=Combination high temperature-low temperature-automatic batch. Combination-CF=Combination high temperature-low temperature-continuous flow. Dryer-CF=Dryeration continuous flow. A= percent annual rate of inflation. B = 7 percent annual rate of inflation. tion rate to 7 percent or with higher energy price scenarios and the lower general inflation rate, the low temperature system has lowest tosts per bushel. Thus, as for the 0,000-bushel case farm, and without knowledge of future energy prices, the low temperature system appears to be the one to choose to minimize costs for this case farm, too. Case Farm Wrth 0,000 Bushels At this size of operation, dryeration with an automatic batch dryer is the least cost system if "modest" energy price increases prevail. Dryeration with a continuous flow dryer could also be used; however, over a 0-year period purchase of this system would result in a real sacrifice of roughly $,600 to $6,00 (depending on the rate of inflation), when compared with the dryeration-automatic batch system. Over the 0-year period the costs for the batchin-bin or low temperature system would be still higher. The cost effectiveness of the dryeration method of drying at this size, especially with the automatic batch dryer, is clearly evident. For "significant" energy price increases the lowest cost system is either a dryeration system with an automatic batch dryer or a low temperature system. Here again, the low temperature system's exclusive use of electricity makes it cost competitive even though it's initial investment costs are higher than that of a dryeration system. Under "drastic" energy price increases, the low temperature system is clearly the lowest cost system because of its energy cost savings.

12 For this case farm size it is not possible to select a single system that is less expensive regardless of future energy price behavior. If energy prices increase in the "modest" to "significant" range, dryeration with an automatic batch dryer is the lowest cost system. If energy prices increase in the "significant" to "drastic" range, the low temperature system is the lowest cost system, but again keep in mind that this system is not expected generally to handle corn with more than percent moisture. Case Farm With 60,000 Bushels For a case farm which does not have a bucket elevator incorporated within the drying and storage system, the lowest cost systems for each of the price scenarios is nearly the same as for the 0,000 bushel case size. However, with "modest" and "significant" energy price increases, dryeration-continuous flow is lowest cost instead of dryeration-automatic batch. For the system with a bucket elevator, dryeration with a continuous flow dryer is clearly the lowest cost system under both the "modest" and "significant" price scenarios. Under the "drastic" price scenario, however, the combination high-low temperature system with an automatic batch dryer is the lowest cost system. This change occurs because the combination system relies less on propane for high temperature drying and relies more on electricity to power aeration fans than does the dryeration system. Case Farm Wrth 80,000 To 00,000 Bushels Inclusive For these case sizes, the lowest cost system with "modest" arid "significant" energy price increases is dryeration-continuous flow. With "drastic" energy price increases the combination high-low temperature system with a continuous flow dryer is the lowest cost system, except when the inflation rate becomes high enough to cause the real costs of the dryeration-continuous flow system to decline. The decline caused by the high rate of inflation is significant enough for the dryeration-continuous flow system to become strongly competitive fdr the least cost system in this case. Case Farm With 00,000 Bushels For this case size, the lowest cost system, regardless of the price scenario, is dryeration with a ' continuous flow dryer. The combination high-low temperature system is no longer the lowest cost system under the "drastic" price scenario because its initial investment cost has become so high at this size that the energy savings of the system can no longer sufficiently offset the increased purchase price. Given the per bushel cost differences on 00,000 bushels annually over a 0-year period a purchaser's real (constant dollar) loss would be roughly between $,000 and $6,000 (depending on rate of inflation) by choosing combination-continuous flow over dryeration-continuous flow. Choice Of Grain Drying And Storage System Anticipating Need For A Larger System In The Future The purchaser of a drying and storage system may want to select a system that can be expanded to accommodate larger grain volumes in the future. The selection of a system which will remain the lowest cost system as it is enlarged depends on the grain volume the purchaser anticipates as the final capacity of the growing system. In the discussion that follows, two alternative expansion paths are considered. The first is an expansion from 0,000 bushels to a grain volume of 60,000 bushels in which the purchaser does not anticipate the need for a bucket elevator. The second is an expansion from 60,000 bushels to 00,000 bushels in which the purchaser already has incorporated a bucket elevator into the system. Anticipating Future Expansion To 60,000 Bushels With "modest" energy price increases, the purchaser should plan on a dryeration system because this system is clearly the lowest cost in the 0,000 bushel range. This plan calls for higher unit costs at the 0,OOO-bushellevel where the low temperature system is definitely the lowest cost, but already at the 0,000 level dryeration is a close second to batch-in-bin as the lowest cost system. If energy price increases conform either to the "significant" or the "drastic" price scenarios, a low temperature system has the lowest cost in most situations in the 0,000 to 60,OOO-bushel range. Under these circumstances a purchaser is well advised to begin with a low temperature system (since it is also the lowest cost system at capacities of 0,000 and 0,000 bushels) and merely enlarge it. However, as mentioned previously, the low temperature system without favorable management practices and climate is somewhat inflexible in that problems of spoilage rise quickly if the harvested corn has a moisture content greater than to 6 percent. A purchaser who envisions harvesting corn at this or higher moisture contents may wish to consider the acquisition of an automatic batch dryer in addition to low temperature facilities. At appropriately low moisture contents the system can be operated as a low temperature facility. In the event of higher moisture contents at harvest time, the high temperature dryer can be used in a combination high-low temperature fashion to remove a portion of the moisture content, and the remainder of the drying can then be accomplished by the low temperature technique. The combination system can reduce the risks associated with years of excessively wet corn. A purchaser planning to expand from a capacity of 0,000 bushels to 00,000 bushels or more should plan for acquisitions of a bucket elevator at 60,000 or 80,000 bushels and essentially be guided by the considerations discussed for the second expansion path,

13 Anticipating Increasing Capacity From 60,000 To 00,000 Bushels Or More A purchaser who plans expansion to very large storage capacities (i.e., 00,000 bushels or more) will want to plan on a dryeration system using a continuous flow dryer if energy price increases conform either to the "modest" or "significant" scenarios. Under these scenarios, this system clearly has the lowest per bushel cost for all case farm size between 60,000 and 00,000 bushels. However, if energy price increases are "drastic," the combination high-low temperature system has the lowest cost for case farm sizes between 60,000 and 00,000 bushels, but for the 00,000-bushel size dryeration is the least cost method. Thus, if expansion is to a grain volume in the neighborhood of 00,000 bushels, a dryeration system is the optimal choice. Conclusions A model of on-farm grain drying and storage operations was developed in order to assess the relevant cost for eight alternative drying and storage techniques over a 0-year time span for case farms with varying volumes of grain to dry and store. Corn drying and storage systems that fully dry (i.e., to. percent moisture) corn before placing it in storage can take advantage of economies of scale in bin contruction and stored corn maintenance (aeration systems). Currently, the costs of fuel and/or electricity (energy) do not comprise a large portion of the total annual cost of drying and storage operations. However, as energy prices increase, fuels and/or electricity become an increasingly larger proportion of real annual costs. Therefore, the least cost method of drying and storing today may not be the least cost method a few years hence. As energy prices rise, substantial savings on fuel costs are realized by systems that rely, at least in part, on grain aeration for moisture removal during drying operations. The hybrid systems (dryeration and combination high-low temperature) and the low temperature, in most instances, have higher initial investment costs than the more conventional forms of high temperature drying using a continuous flow dryer or an automatic batch dryer. Nevertheless, the low temperature and the dryeration systems are the lowest cost systems in most situations despite increases in the general inflation rate and in energy prices. The reason is that the low temperature and the dryeration systems are only modestly high in investment costs and are relatively energy efficient. For the smaller case farm situations, the low temperature system is in most situations the least cost system; at the higher energy prices, its competitive edge is sharpened because it uses no propane, whose price we have assumed to increase at a faster rate than that of electricity. For the larger case farm situations, the hybrid systems are typically the lowest cost system. The reason is the savings asso ciated with substituting electricity for propane. Low cost expansion of drying and storage facilities is realized through the hybrid systems. Both of these systems make relatively efficient use of energy in drying. The dryeration system, in particular, is an optimal system for expansion because it fully dries corn before placing it in storage. The fact that the corn has been fully dried allows this system to take full advantage of economies of size in bin construction. References. Butler Manufacturing Company, Agri-Products Division, Kansas City, Missouri, "Manufacturers Suggested Selling Prices," effective March, Cloud, Harold A., R. Vance Morey, Robert J. Gustafson and Kenneth L. Walter, "A Combination High-Temperature, Low-Temperature Corn Drying System," paper prepared for The Proceedings of the Grain Conditioning Conference, University of Illinois, Champaign, Illinois, January -, Holmes, E. S. and R. I. Lipper, "Low Temperature Grain Drying," Cooperative Extension Service, Kansas State University, Manhattan, Kansas, September 97.. Lytle, P. W., Thomas L. Thompson and E. H. Rasschaert, "Simulation and Economic Analysis of On-Farm Grain Drying and Storage Systems," paper presented at the 97 Annual Meeting of the American Society of Agricultural Engineers, Stillwater, Oklahoma, June -6, 97.. McFate, K. L., " of Drying Grain with Different Drying Systems," Columbia Extension Division, the University of Missouri, Columbia, Missouri, McFate, K. L., "Grain Drying: Low Temperature vs. Natural Air," Agricultural Engineering, Extension Division, University of Missouri, Columbia, Missouri, July, McKenzie, B. A., G. H. Foster, R. T. Noyes and R. A. Thompson, "Dryeration - Better Corn Quality with High Speed Drying," Cooperative Extension Service, Purdue University, Lafayette, Indiana, Morey, R. Vance, Harold A. Cloud and William E. Teuschen, "Practices for the Efficient Utilization of Energy for Drying Corn," Transactions, American Society of Agricultural Engineers, Vol. 9, No., 976, pp Pierce, Richard O. and Thomas L. Thompson, "Energy Utilization and Efficiency of Crossflow Grain Dryers." Paper presented at the 97 Annual Meeting of the American Society of Agricultural Engineers, Davis, California, June -, 97.