In today’s world of volatile commodity prices and ever increasing energy costs, effectively managing inventory shrink at grain storage and handling facilities has become paramount to improving profitability.
During a presentation at the GEAPS Exchange 2009, Bob Marlow, regional operations manager for The Andersons Inc., Delphi, Indiana, U.S., said that when shrink is not managed properly, the financial impact on a facility can be significant, potentially leading to the demise of the grain facility itself.
While the list of factors that can contribute to shrinkage of inventory is a long one, there are four primary causes: mechanical, aeration, dryers and quality deterioration (damage).
Marlow said The Andersons has developed an in-house formula to help the company account for shrink that falls into the mechanical category.
"The simple fact remains that between the time those bushels first hit your dump pit until the time it leaves your outbound spout and scale, there are some visible and invisible losses," Marlow said. "Spills, losses due to dust filters or dust loadout, rodents, transferring, small inadvertent mixes in the handling system — they all can add up."
Marlow said The Andersons uses a formula in which it takes all receipts by commodity, adds all shipments and any in-house transfers, divides that number by two, and multiplies the result by .0005 (one-half of 1%). For example, in a typical month (at harvest time) at one of the company’s facilities, n bushels plus shipments of 2.5 million and transfers of 1.5 million.
"In this example, we took a monthly handling shrink of 2,875 bushels," Marlow said. "In essence, we wrote off our DPR (Daily Position Record) the 2,875 bushels and took a financial hit based on the value of those (soybeans) at month’s end, in this case $28,750, as I used $10 per bushel. Is it totally accurate and perfect? No, but it does attempt to account for the shrinks associated with moving a commodity through our facilities."
In addition to the "normal mechanical shrink," Marlow said he factors in handling shrink when building and later reclaiming the outside piles. "At my three facilities, that amounts to an additional 3,150 bushels (6.3 million bushels multiplied by .0005)," he said. "While that may seem a little extreme, I have found that is much easier than a write down."
Aeration shrink can often be overlooked and in many cases underestimated, Marlow said. When you cool grain and the adjacent air spaces, you lose moisture, and that is weight.
The science of moisture removal via aeration is governed greatly by the starting temperature, moisture, air flow rate, relative humidity, fan time in hours, and can even be impacted by the commodity being cooled.
Marlow said the formula used by The Andersons to address aeration shrinks involves taking the bushels under aeration multiplied by the degree of temperature change times a factor of .022 multiplied by .012.
"The .022 ‘factor’ is a number we chose to use for the starting temperature correction," he said. "The .012 (1.2%) is a rounding off of the mathematical shrink formula of 1.183%, widely used in the industry. We use a simple spreadsheet to track and calculate monthly aeration shrink.
"Here again, we take this shrink to our DPR on a monthly basis, choosing to calculate the shrink based upon the beginning versus ending temperatures. Depending on the size of the facility and the amount of grain under aeration, this can be a sizeable number."
Marlow noted that it is not unusual for The Andersons to receive newly harvested wheat in July that is 90 degrees F and then cool it to around 40 degrees F in the fall. He said the amount of aeration shrink in that scenario with a 500,000-bushel tank of wheat would be calculated as follows: 500,000 multiplied by 50 degrees, multiplied by .022, multiplied by .012. The result would be 6,600 bushels of aeration shrink.
The Andersons also factors in aeration shrink on its outside grain piles. The company tries to get the exhaust temperatures of its fans when taking carbon dioxide readings to have a basis to use when calculating the shrink.
"We try to be somewhat conservative in our calculations for the piles," he said. "At one of my facilities, we have 3.3 million bushels under tarps. Every degree change on these bushels equals 475.2 bushels. You don’t want to be wrong by 20 degrees, or 9,000 bushels."
Marlow said dryer shrink is the most critical of the four major causes he discussed.
"In my area of operation, this single factor is the most studied, least understood, and has the greatest set of variables," he said. "Under the right conditions, it can literally dwarf the other shrink factors. Granted, if we miss the others, it is significant, but at a facility that dries nearly 5 million bushels of corn in the fall, the numbers can be huge, as any operators who dry large quantities would agree."
He said most of The Andersons facilities have a column-style dryer with a screw auger system at the discharge. Most have a system of sample collection, along with varying ways to calculate "dry bushels" output of the dryers.
"We have an electronic pick up that gives us a count," Marlow said. "Depending on the type used, there is usually a resettable electronic counter tied to the sensor that allows us to gather hourly as well as daily counts. It is through the collection of our wet and dry samples, combined with our counter information, that we can monitor dryer performance on a daily basis as well as allow us to record dryer shrink."
It is critical to determine the bushels, or pounds, per count or revolution, he said, with it preferably being done several times during harvest to weigh over the dryer output and come up with a bushel per count.
The bushels per count will vary with test weight, by type of grain, moisture, condition of your feed screws, etc., so it is important to run as many tests as practical.
"In general, we gather samples every hour, both wet and dry," he said. "The portion of the sample that actually ran through the moisture meter cup is then placed in a sealable container, allowing it to temper. The samples are then run the next day on our moisture meter in our inspection department, and it is this moisture determination that we use to calculate our shrink."
Marlow said the facility operators use the moisture meter at the dryer to make adjustments to the dryer, but they also try to cross-check the meters with frequency to ensure accuracy. That’s because if any of the input numbers — either wet, dry or bushels per count — are missed, the final calculation changes drastically, especially for dryer shrink.
QUALITY DETERIORATION SHRINK
There is plenty of scientific evidence that quality deterioration of grain results in weight loss. The Andersons, Marlow said, uses the following formula to calculate this loss: for every 3% increase in damage, it reduces the weight (bushels) by 0.5%.
So for example, if you were to put out a corn pile in the fall, say at 5% damage, and pick it back up in the spring at 11%, then you could calculate that the 6% increase equals about 15,000 bushels (1.5-million-bushel pile, multiplied by .5%, then multiplied by 2).
"I would caution, however, that this is an area that you have to be very careful with," Marlow said. "We are dealing with averages, not absolutes, so before you arbitrarily reduce or shrink your inventory based on this formula, I would test it for reasonableness. In this case, it may well be that the entire pile did not go from 5% to 11%, but rather a section of the surface went from 5% to 50%. It may be impossible to separate the corn that had the greatest deterioration, but it also simply drives up the average."
He said it may be prudent after you reclaim your pile to subtract all your handling and aeration shrinks from your starting inventory. Compare it with the bushels you had an opportunity to weigh back in, and then test the "quality deterioration" formula to see if it has relevance.
"Although we have used this formula in the past to help us try to reconcile an inventory shortage, I can remember a few times when it was used before an adjustment was mandated," he said.
At the end of his presentation, Marlow noted that the Andersons have a system for tracking drying and mixing, which he said can be the difference between a profit and a loss at a grain elevator.
"We track the bushel from the time it hits our doorstep until it leaves our load-out spout," he said. "On the positive side, we track discounts assessed to the customer and gains in quantity, quality, and any premiums received. On the negative side, it’s the discounts we took at loadout, the shrinks we wrote off while under our control, and any premiums paid on the inbound.
"Our goal is to do all we can to ensure the net of all those items is a positive on the bottom line."
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