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Storage is carried out in order to extend the period of availability of a crop to a consumer. In the case of staple food crops long-term storage is, of course, essential. The harvest period may be just a few months but the staple has to be consumed throughout the year. Storage can be carried out by the farmer, the trader (or marketing board) or by the consumer. With regard to more perishable crops, storage can be used to extend what is often every short period of availability. However, this is only viable when the produce can be sold after storage at a price higher than the into-store price, with the difference fully covering the costs of storage, as well as offering an incentive to take the risk that a loss may result.
Storage costs fall into four categories:
The biggest single factor affecting storage costs is capacity utilisation. Where a store is used frequently to full capacity costs per unit will be low. Where one is kept empty for much of the time costs will be high.
Where commercial storage facilities are used it is relatively simple to work out physical storage costs incurred by the trader as he will be charged on a basis such as kilogram/days, box/weeks or tonne/months. The cost per kilogram for the period the produce is in store can then be worked out. Where the trader hires an entire warehouse and moves produce in and out you need to have an idea of the average number of containers/kilograms in store during the period for which the store is hired. An example of this calculation is shown in Figure 5.
Figure 5
Calculating storage costs
Assume that a warehouse is hired for 120 days of the year at a total cost of $600 and that the weighted average contents are 250 bags of potatoes.
Then the storage cost is ...
$600 ÷ 120 days = $5.00 per day
$5 ÷ 250 bags = $0.02 per bag/day
There will usually be quantity losses while produce is in store. This may be deliberate (for example, when grain is dried so that it will store better) or accidental, due to bad storage. With fresh produce some quantity loss is almost inevitable, however efficiently it is stored. Physical losses in storage need to be treated as costs in the way outlined in Chapter 5. Quality losses are also inevitable and for the trader these are reflected in the prices he or she receives. As shown in Chapter 5, it is important to get an accurate estimate of the weighted average price stored produce is eventually sold at.
It is easy to ignore the fact that produce while in store incurs a financial cost for the trader. To do so, however, would give a totally inaccurate impression of marketing costs. An example of a realistic calculation of storage costs including additional costs such as bank interest is shown in Figure 6. This example assumes that there is no loss. However, a four-month period of storage will almost certainly lead to some losses and these need to be built into the calculations.
Figure 6
Calculating storage costs over time
Assume that a trader buys potatoes at $10 per bag and keeps them in store for 4 months. To do this he has to borrow money at 12 percent per year.
Then the cost of bank interest is ...
$10 x 0.04 (12% p.a. over 4 months) = $0.40 per bag
Thus a realistic calculation of storage costs per bag for our consignment of potatoes is ...
Storage charge for 120 days at $0.02 per day = $2.40
Interest charge of $0.40 per bag = 0.40
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Total cost per bag = $2.80