PROFITABILITY OF ALFALFA HAY STORAGE USING PROBABILITIES: AN EXTENSION APPROACH



December 1980


Western Journal of Agricultural Economics

be compared to other investment alterna-
tives; and 3) provides information on the
probability of receiving a specified rate of
return for alternative marketing months.

Procedure of Analysis

Data for the analysis are monthly prices for
baled alfalfa hay in Nevada for the years 1950
to 1977 [U.S.D.A.].1 The procedure follows
three sequential steps. First, Duncan’s mul-
tiple range test is used to determine which
months’ prices are significantly different from
prices in June, July, August, and September
[Steele and Torrie]. These four months are
harvest months for Nevada alfalfa hay, and
producers must decide whether to sell im-
mediately or wait for possibly higher returns.
For convenience these months are referred
to as harvest months. Months for which
prices are significantly different (.05 level)
than prices in harvest months are called
market months. This definition of market
months reduces the Iiklihood of accepting
differences in sample averages which are due
to chance.

The second step involves calculating aver-
age percentage rates of return from storage
between harvest months and market months.
These are values which producers must con-
sider as the “opportunity” foregone if alfalfa
is sold at harvest. For calculating percentage
rates of return, the following items are con-
sidered relevant costs for alfalfa storage:

1. Insurance: Insurable risks are involved
with storing alfalfa; the primary one is fire. A
representative charge by Nevada insurance
companies is $1.85 per $100 value of alfalfa
hay per year. For purposes of calculating
insurance cost for this study, alfalfa hay was
valued at $30 per ton.

2. Shrinkage and Spoilage: Shrinkage re-
sults from moisture losses after initial stor-
age. Additionally, snow and rain may cause
molding or rotting. A 3 percent one time loss

1At the time data were collected for analysis, more
recent data were not complete and thus not used.
is assumed. This figure is based on discus-
sions with producers since no relevant re-
search has been conducted in Nevada.

3. Other Costs: Land, buildings, and pro-
ducer time are treated as zero. Producers do
not usually have a short run alternative for
land used for alfalfa storage. Most western
hay is not stored in buildings and producer
time devoted to checking this stored crop
tends to be minimal.

Using these costs, the following formula
estimates the percentage rate of return from
dollars invested in storage:

Percentage rate of return =

(Pm × (1 — shrinkage) — (Ph + insurance cost))
(P11Tinsurance cost) (time)

XlOO

Where:

Pm = price per ton of alfalfa hay during
market month

Shrinkage = 3 percent

Ph = price per ton of alfalfa hay during
harvest month

Time = fraction of year hay is stored

Insurance cost = .046 cents per month
times month of storage
(length of storage is as-
sumed known at har-
vest).

This formula is derived by solving for r in
the following discount formula:

Pm × (1 - shrinkage)

Ph =---7—-------r-≡-2 — insurance cost

l + (r×time)

where r is percentage rate of return divided
by 100, and all other symbols are as de-
scribed above.

An example will illustrate use of the per-
centage rate of return formula. Let
Pm be
$30;
Ph be $28; time be ⅛ (4 months); and
insurance cost be $.184 (.046 × 4 months).
Then the percentage rate of return is cal-
culated as follows:

124




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