Country elevators and grain terminals, although similar in concept, handle grain in a similar way but with fundamentally different goals.

Country Elevators

In the classic country elevator model, an elevator will typically purchase grain from the local farmer, and provide a variety of services to support that process, including grain split accounting, storage, cleaning and/or drying, and sales of crop input supplies. The fundamental business model is built around grain purchase from the originating farmer, with grain price, value-added services, and longstanding customer relationships differentiating elevators.   Many elevators offer the ability to deliver against unpriced contracts, such as basis contracts or deferred price/price later contracts as well as open storage. In addition to offering merchandising contracts, grain elevators may also make money by increasing the quality of the grain through grain blending or superior bin management.   

Country elevators need a CTRM (Commodity Trade Risk Management system) and grain management software that allows them to maintain a position and engage in risk hedging. Their key goal is to buy grain at the best price possible while maintaining a strong relationship with the farmer, and reselling that grain for a profit. 

Terminal Storage

Grain terminals tend to be larger and centrally located near ports or other transportation hubs.  They offer large storage capacity, and transloading options, such as switching from truck to rail, barge, or vessel.  Although grain terminals may purchase grain, typically the emphasis is on storing the grain rather than purchasing it. They will charge discounts for wet grain or other quality factors and may charge drying, but the emphasis is typically more on storage than purchase price.  The purpose of grading the grain at scale ticket time is to record the quality of the grain deposited so that the same approximate quality can be withdrawn at a later date.

Elevator Storage

Storage is typically handled differently in a country elevator versus a terminal operation. In a country elevator, grain is usually brought to the elevator to be purchased, and grain storage fees may be charged in order to encourage a purchase commitment. In these cases, grain will often be charged on a load-by-load basis, with storage being charged on specific deliveries of grain until the grain is settled. 

In a terminal operation, storage is the goal rather than an ancillary part of the operation, with the commodity being stored until it can be sold or transloaded to another facility.  As there is a large quantity of grain involved, storage is typically computed on a daily basis, based on the customer’s end-of-day balance at the terminal. The most typical cycle will involve the grain being dropped off at a facility, stored for a period, and then shipped out, often via different transport modes. For example, you might drop off 200 truckloads of grain, which you then ship via a compartment on an ocean-going vessel.  The terminal would make money by charging for the initial elevation and drying of the grain, and the storage of the grain, and perhaps an unloading fee when the grain is shipped.

Customer to Customer Transfers

Sometimes the sale and purchase of the grain might actually be between two of the terminal’s customers.  In this case, the ownership of the grain will change, but there is no accounting impact from the terminal's point of view, in that they are still responsible for delivering the same quantity of stored grain, albeit for a different customer. 

This transaction is similar to a transfer between bank accounts, where the bank is recording the change of balance between two customers without otherwise participating in the transaction.

Internal “House Account”

Many large agribusinesses own a network of elevators as well as one or more terminal facilities.  Typically, grain elevators and terminal operations will be treated as two separate business lines, with a separate profit and loss for each facility and business. The grain elevator software and the terminal management software need to work together in terms of logistics and shipments, but keep a clear delineation of ownership and the profit due to the merchandising of the grain.

When a large agribusiness owns a terminal, the terminal might actually store their own grain.  This is typically accomplished by setting up a “house account” that treats your internal purchases, sales, and transfers largely as if you were a third-party customer.  The advantage of this approach is it allows you to separate the margin from your grain procurement business from the margin on your terminal business. 

Agrosoft Terminal Module

Agrosoft’s Ag Accounting Software package offers a Grain Terminal Management Software Module, which includes these features:

• Ability to receive grain into a terminal facility, and charge for freight, elevation, drying, or other factors
• Ability to pay a 3^rd party for services such as freight, transloading, or stevedorin
• Ability to compute and invoice for storage on a regular, user-defined basis.
• Ability to charge storage based on either the gross weight unloaded or the net stored.
• Ability to transfer grain between two customers.
• Ability to purchase the grain in your own facility.
• Ability to purchase grain or sell it into your own corporate “house” account, including full integration with our country elevator grain module.
• Ability to unload grain and ship out via a variety of conveyances, including truck, rail, barge, and vessel.

Agrosoft’s software solutions support your entire business, from crop inputs through grain scale operations and elevator management, through to terminal storage and the final delivery of the grain.  The close integration of these modules reduces dual entry and gives you the accurate and timely information you need to manage your business.

We hope to see you at booth #111 at the NGFA in California next week, where we will be raffling off a set of GSS golf balls, AI powered to guarantee a hole-in one every time, in a way that won't look at all suspicious.

Mary Marquardt, Mike McGeever, and Kurt Triebe will be brokenhearted to leave the subzero February temperatures in Chicago to celebrate the coming of spring at the March NGFA in California. Please stop by Booth #111 for a look at our Agrosoft customer Portal, free M&Ms, and tips about how to use your computer monitor to give yourself a fabulous January tan.

What is Costing Costing You?

The answer is everything.  Agricultural accounting software that will allow you to understand the true costs of your sales is the key to developing strategies for growing your business in a profitable, sustainable way.  While this may sound easy, it’s not, particularly in the agriculture industry, which presents a unique set of challenges.  How do you develop an accurate margin when the costs of your ingredients are fluctuating or are fundamentally unknowable, sometimes even after you’ve manufactured and sold the product?

My Accounting Professor Made It Sound Easy

In principle, it sounds easy.  You purchase inventory as an asset, and when you sell it you move the cost of the asset to the cost of goods sold.  The difference between your sales price and your purchase price is your gross sales margin.  Adding in your other costs (salaries, facility costs, overhead) enables you to compute the profitability of each sale, and manage your business. 

This approach works well for products with a readily known purchase cost, such as buying and selling a rake through your farm supply division.  But grain accounting is far more complex, as you are also managing merchandising contracts, risk hedging, and terminal storage. Grain can be bought using unpriced contracts, where the final futures or basis price may not be known for weeks or even months after the purchase has occurred.  Accounting rules also allow you to revalue products that are bought and sold in commodity markets, so the corn you bought last month can (and should) be revalued in you inventory at your current market price.  Indeed, accounting for commodity inventory is much more analogous to accounting for negotiable securities like stocks, which are revalued with an unrecognized gain or loss every month.

If you are buying and selling commodities such as corn or wheat, it is valid to price them after the purchase and revalue them as market conditions change, typically at the end of a financial period.  However, the problem becomes more complex when you use the product internally to manufacture other products.  What is the value of the corn that you have purchased but which you haven’t paid for (and for which you don’t have a price) when that corn has been used to manufacture cornflakes?).  Revaluing it (and possibly recognizing a gain in the value) doesn’t seem like a viable solution, as if you are doing feed blending sucking corn out of cornflakes and putting it back on the cob is a process beyond the scope of most grain processing facilities. 

OPTION ONE:  WHAT’S MINE IS MINE

One solution is to separate the risk of fluctuating commodity pricing from the manufacturing of your product.  This can be accomplished by running the commodity procurement traders and the feed/manufacturing facilities as separate cost centers.  Unpriced (or priced) grain can be transferred from the grain elevator to the feed/manufacturing division at the current standard cost, typically derived from the current market price.  The advantage of this approach is that you segregate out the gains/losses due to good (or bad) commodity trade risk management in the grain division, without passing the gains or losses onto the feed division.  So if you managed to purchase corn at $3 a bushel, and when the corn was actually transferred to the feed manufacturing division it was worth $7 a bushel, then that gain would be recognized by the traders rather than the feed division, with the grain elevator software tracking the difference.  

Note that some companies allow the feed division to buy grain externally if they can find another price, or allow the grain division to sell their grain to a competitor if they can get a better price.  Although this might seem non-intuitive, the goal of this approach is to create market efficiencies that drive better purchase decisions. 

OPTION TWO:  MARKET  TILL YOU MAKE IT

Segregating purchasing and manufacturing works for businesses that run their purchasing and processing functions as separate divisions, however, there are times when it makes more sense to have a single bottom line.  For example, if you are running a livestock company, or a feed manufacturing company, and purchasing grain is merely an adjunct to your core business, then your goal may be to reflect all costs in your finished product as accurately as possible, rather than to create a separate cost center for grain.

We recently completed a new module that allows us to accumulate costs – including the costs for unpriced grain – into your final inventory cost, even if the product used for manufacturing is still unpriced.  This enables you to seamlessly accumulate your commodity purchase costs into the finished products costs for your feed blending or fertilizer blending.  The procedure works as follows:

1)  You run your grain purchasing system as a periodic inventory system.  You record inventory purchase costs only when the grain is priced.

2)  At the end of the period (weekly, or monthly) you bring the unpriced inventory to market.  If the inventory has been used in manufacturing, then you move that cost into your finished goods inventory or cost of goods sold.  Otherwise, you keep the cost as part of your raw materials inventory. 

3)  You would reverse out the “to market” entries, and repriced any unpriced grain at the end of the next period, until the grain is actually priced.

4)  You also have the option of folding other expenses (such as your risk hedging or other commodity risk management costs) into your market price.

CONCLUSION

Computing margins for finished products that use unpriced inventory creates a unique set of challenges.  Agrosoft agtech software allows you to transfer unpriced costs using a fixed market price or standard cost, or adjust the unknown cost until the purchase is complete and the price can be fixed.  There is no right answer, and the choice may well depend on whether you are a grain business with a feed blending division or a livestock/feed manufacturing company with a grain division.  Whatever your situation, our dedicated team of professionals is here to develop the perfect solution for you.

Mike McGeever and Mary Marquardt discovering a new way of giving while visiting the National Grain and Feed Association Country Elevator Conference. As Agrosoft provides grain elevator software, terminal software, retail ag and fertilizer software that feeds the world, Mary used the giving machine at Union Station in Kansas City to buy a nutritious meal for someone in need. Mike chose school supplies, and he used to chew on his erasers in school.

When he isn't delivering presents to good boys and girls around the world, Santa works as a software developer and business analyst at Grossman Software Solutions. Santa and his hard-working elves make sure that the world is fed by providing the ERP software companies need to run their grain elevators, feed mills, crop inputs businesses, country stores, and terminals. 

A MERRY CHRISTMAS to all!

(Note: If you want to learn more, please call us after December 25th, as Santa is quite busy until then.)