BULLETIN 904 MAY I958 Casts, SflVPHqSS “financing Bulk Tanks an Texas Dairq Farms '5 _ I ._,. I4 — I I lg ... “ ‘vi-savings in hauling— IO cents \ |Q - \ \ \ V) 8 — E savings in hauling — I5 cents O >- 6 - ~-_.§__._. § '§'§.__§ 4 _ _———¢_.-___ c—o--—-¢__,___-"—"_.—- \ g t¢111t1_———— 2 - savings in hauling — 2O cents O l I I I I I I I IOO 200 300 400 500 600 700 800 Annual production, l,OOO pounds Estimated number oi years required for savings from a bulk tank to equal additional costs at different levels of production and savings in hauling costs. f», ‘s! TEXAS AGRICULTURAL EXPERIMENT STATION R. D. LEWIS. DIRECTOR. COLLEGE STATION, TEXAS. SUMMARY This study presents information which will help dairy iarmers determine whether a bulk w will be profitable. It also presents data to help dairy farmers and lending agencies in iinan ' bulk tanks. Data on costs. savings and financing were obtained by interviews with ‘I91 bulk tank o -; in the North Texas market area and 36 tank owners in the Corpus Christi market area. AdditiQ iniormation on costs also was obtained irom bulk tank dealers in North Texas. - g‘ Additional costs involved in changing to the bulk system of handling milk include oi purchasing and installing the tank and compressor. a new hot water heater in most instan ; remodeling and rewiring the barn and milkroom. interest on the additional investment, expense ior repairs. upkeep. taxes and insurance. The major savings item is lower ha ' charges. About one-hali oi the tank owners interviewed reported a savings oi l5 cents _ hundredweight oi milk. while about one-iourth reported a savings oi 20 cents and the rem' " one-iourth a savings oi l0 cents per hundredweight. Additional savings result irom less wastage. elimination oi the investment in can equipment and some savings in labor. The length oi time a tank will last and the savings in hauling charges determine whet“ a bulk tank will be profitable. Ii the tank lasts only l0 years and savings in hauling char; average l0 cents per hundredweight over the 10-year period. annual milk production mt amount to about 160.000 pounds ior the tank to pay ior itself out oi savings. Ii the tank -» 15 years and savings in hauling amount to l5 cents per hundredweight. an annual productionr about 100.000 pounds would be needed. A production oi about 75.000 pounds oi milk perry will be needed. however. ii the tank lasts 20 years and savings in hauling costs average cents over the iull liie oi the tank. Commercial --- The most common interest rate wai The ability to obtain credit was not a maior problem tolmost iarmers. and bulk tank dealers were the major sources oi credit. percent: however. in a number oi instances. interest was charged against the iull iace amount the loan rather than against the unpaid balance. For slightly over one-hali oi the credit purch ~ =f the terms oi the loans were 3 years. with repayment conditions usually providing ior mont; installments deducted directly irom the milk checks. i‘ Although 3 years was the most common term. a longer period oi time would be necessi ior savings irom a bulk tank to equal the additional costs ior all except dairymen with t largest production. Thereiore. repayment oi a 3-year loan in most instances would need to co J partly irom sources other than savings irom the tank. CONTENTS Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advantages and Disadvantages oi Bulk Tanks . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . .. ‘A Purpose and Method oi Study . . . . . . . _ . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . R . . . . , . . . . R . . . . . . . . . .. i Additional Costs . . . . . ._ . . . . . . . . . . . _ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . .. Savings . . . . . . . . . . . . . . . . . . . . . . _ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . , . . . . . . . . . . . . . . . . . . . . Sources oi Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V . . . . . . . . . . . . .. Down Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ .' . . . . . . . . . V . . . . . _ . . . . . . . . . . . . . . . . . Repayment Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..l Recommendations . . . . . . . . . _ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .l Acknowledgments . . . . . . . . . . ; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .~ , . . . . . . . . . . . . . . . . . . . . . . . .l . .l Reierences . . . . . . . . . . . . . _ . . . . GRADE A MILK PRODUCED IN THIS COUNTRY was handled in 10-gallon cans until a few = ago. Dairymen usually poured the milk _t_he cans at milking and cooled it in Water- ‘ can coolers. The milk was picked up daily i‘ farm by trucks and delivered to the plant. ince 1954, many Texas dairy farmers have w replacing milk cans with the bulk system of dling milk. This change is part of a general 'onwide trend occurring in varying degrees ifferent sections of the country. Under the system the milk is stored in stainless steel .3" which vary from a capacity of 150 to more ‘- 1,000 gallons. It is cooled by a refrigerant is picked up, usually every other day, by i. trucks. These trucks pump the milk ‘aanically, directly from the farm tank to the si-ADVANTAGES AND DISADVANTAGES OF BULK TANKS {Although bulk handling has spread rapidly in » 1s during the past 4 years, nearly three- " hs of the Grade A dairy farmers in the te are still using the can system. Many of i 0 are wondering about the advantages of i hasing a tank. These dairymen should weigh ifully the advantages and disadvantages of _‘ bulk system. A The most important advantages of the bulk tem are: 1 1. Lower hauling costs. Savings in the cost of cans and can coolers. Savings in wastage. 2 3 A 4. Elimination of can lifting. i 5 Savings in labor. 6 Opportunity for increasing milk quality. 7 Possible savings in electricity. ‘The disadvantages of bulk tanks are: 1. High initial investment for bulk equip- a ment. .- 2. Possible expense for remodeling and re- ’ wiring the milkroom. i, 3. Possible losses in disposing of the can ' equipment on hand. espectively, assistant professors and extension farm anagement specialist, Department of Agricultural Eco- omics and Sociology. Costs, Savings and Financing Bulk Tanks on Texas Dairq Farms DONALD S. MOORE, RANDALL STELLY and CECIL A. PARKER* 4. Need of an all-weather road to the milk- house. 5. Possibility ofilosing four milkings if the milk is rejected. PURPOSE AND METHOD OF STUDY The purposeof this study is to present infor- mation on the major factors involving costs and savings associated with bulk tanks and to develop a systematic means by which these can be com- pared at different production levels. This in- formation should be valuable to dairymen and to lending agencies financing bulk tanks. Since the size of capital investment required involves a major financing problem to many farmers, the financing aspects of this adjustment are discussed under the section on “Financing.” A survey was made of 191 Grade A dairyw producers who have bulk tanks in the North Texas milkshed. These producers, selected at random, included approximately one-third of all Texas dairymen in the milkshed who had purchased bulk tanks by January 1957. Data also were obtained from 36 or approximately one-third of the bulk tank producers in the Corpus Christi milkshed. Interviews, also were obtained from 179 or approximately one-tenth of the North Texas producers still using milk cans. A more compre- hensive report of the sampling procedure used in these surveys and the general economic impli- cations of bulk handling are presented in Texas Agricultural Experiment Station Bulletin 894, “Bulk Handling of Milk on Texas Dairy Farms.” Tables were developed to compare the ad- ditional costs with anticipated savings at dif- ferent production levels. Since each farm differs in certain respects from other farms, the costs and savings from bulk handling also vary. Individual dairymen may need to adjust the figures to fit their own situations. For example, the costs of remodeling the barn and milkroom for a particular farm might be larger than the figures shown in Table 1 and should be adjusted accordingly. ADDITIONAL COSTS The most important cost item is the price of the tank. First, it is necessary to decide on the tank size needed, keeping in mind that the tank will be used for at least 10 to 15 years and should be large enough to take care of anticipated production increases over this period. Although no substantial increase in herd size may be 3 planned, some production increase is likely to occur through increased productivity per cow due to herd improvements. The amount of seasonal fluctuation in produc- tion also should be considered when deciding on the size of tank needed. The tank should be large enough to handle the expected peak seasonal out- put. Large fluctuations, however, result in tank use at less than capacity during periods of low production. This increases the cost per gallon of cooling. The dairyman should consider the following when deciding on the size of tank to purchase: his present average daily production, how frequently his milk is picked up (daily or every other day), seasonal fluctuations in production and anticipated increases in total production dur- ing the life of the tank. To illustrate a method for determining the tank size to purchase, let us assume a situation such as that given in the first line of Table 1, where the present annual production is 80,000 pounds (column 1). Dividing this by 365 gives the average daily production of 219 pounds, or about 25 gallons. Every-other- day pickup is the usual custom for bulk handling on Texas farms. Most health codes. require that the tank be large enough to handle five milkings if the milk is picked up every other day. The average daily production of 25 gallons would therefore be multiplied by 21/2 days’ milk produc- tion. Anticipated production increases and seasonal peaks in production also must be considered. In Table 1, it is assumed that the tank would be used for 15 years and that a small increase in herd size and increased productivity per cow would increase total production one-fourth by the end of the 15-year period. This is probably conservative estimate for many dairymen. ' also is assumed that an allowance of 25 perce above the yearly average daily production . needed to handle peak seasonal loads. Dairy cords indicate that this is approximately the d gree of seasonal variation in production by t average Texas dairy farmer. l The size of tank needed ‘may be determin by multiplying the annual daily production ( gallons) by 2% to allow for every-other-day pic up, by 11A, to allow for increased total producti and by 114 to allow for season peaks. g i, amounts to 98 gallons. A dairyman with anfa nual production of 80,000 pounds and under i, conditions stated in the preceding paragraphs f‘ increased production, frequency of pickup g seasonal fluctuations would need a 150-gall, tank, which is the smallest size commonly av able on the market. Many dairymen may wish make different allowances for increases in prod tion and seasonal peaks. Since the average ta will last many years, adequate allowances r careful planning should be made for the futur otherwise tank capacity might restrict futu production changes. The costs for tanks of various sizes are sho. in column 4, Table 1. The prices are typical t those paid by farmers for direct expansion t r tanks installed on the farm. Some variation price exists according to brand and type of ta The two major types manufactured are the. i, bank and direct expansion. The ice bank cool builds up layers of ice around refrigerating c0' located between the walls of the tank. A pu ‘ circulates water over this “ice bank” to the coo ing surface of the tank. In the direct expansi cooler, the refrigerant is pumped through coi TABLE 1. ESTIMATED ADDITIONAL COSTS AT DIFFERENT LEVELS OF PRODUCTION IF DAIRY PRODUCERS SHIFTED BULK TANK HANDLING ‘ Cost oi T tal Annual ex- T tal Total Peak pro- Size Cost Cost of rem d 1.11 (i, d Annual Annual pense for up- ‘rd a; annual duction per tank of a hot water bafin zgdg fiwezh depre-l interest keep, repairs, gnu‘? . production pickup‘ needed tank“ heater milkmom ment ciation" cost‘ itzsaciigggs cost (n (2) (a) <4) (s) (s) <1) (s) (s) (w) <11) r Pounds — Gallons —- — — — — —- — — — Dollars — — — — — — — — 80.000 98 150 1,750 140 120 2.010 134 60 80 274 120.000 ' 148 150 1.750 140 130 2.020 135 61 81 277 160.000 199 200 1.970 140 130 2 240 153 68 90 308 g 200.000 250 250 2.330 . 140 130 2 600 175 , 79 105 359 y 300.000 375 400 3.120 140 130 3.390 226 102 136 464 { 400.000 496 500 3.650 140 140 3 930 262 118 157 537 , 500.000 621 700 4.300 140 150 4 590 306 138 184 628 , 600.000 746 800 4.645 140 160 4.945 330 148 198 676* ~ 700.000 871 900 4.960 140 170 5.270 351 158 211 720 800.000 996 1000 5.250 140 180 5.570 371 167 223 761 , ' ‘Assuming every-other-day pickup, that the seasonal peak daily production will exceed the year-round daily average by percent and that the annual production will increase by one-fourth during the lite oi the tank due to increased herd s‘ and increased production per cow. 2The costs listed are for direct expansion type tanks. “Assuming a lite of 15 years. ‘Calculated at 6 percent on undepreciated balance oi total added investment. ‘Calculated at 4 percent ot total added investment. 4 s» the stainless steel inner wall. While the st of the ice bank type is generally lower i. direct expansion type, the ice bank type consumes more electricity because its must run longer. The type of tank ‘ed probably would not affect the results analysis significantly. i: dairymen purchasing bulk tanks also e new hot water heaters (column 5, Table airymen usually incurred» some expense r remodeling the milkroom and barn and tiring in order to provide ample space and fes for the tank and to comply with health tions. Most costs of remodeling ranged ‘$100 to $200, although in a few instances L.ere substantially more. The remodeling ashown in column 6 of Table 1 were the 1 0st commonly paid by the dairymen inter- 1 total added investment for converting to ulk system of handling milk (column 7, “' 1) is computed by adding columns 4, 5 and _. is assumed that the tank will last 15 years, annual depreciation charge may be com- ’ by dividing the total added investment by lumn 8, Table 1). It is questionable Whether f. will have a salvage value at the end of useful life, and no allowance was made for I actor. e annual depreciation charge does not in- 1 expenses incurred after the initial invest- I is made. A charge should be made for the int of new capital invested since it must be a. ed that the capital could have been put to other productive use. An annual interest a of 6 percent on the undepreciated balance _~ added investment was used, since this_was the rate most commonly paid by those using credit to purchase tanks (column 9). Cost of upkeep and repairs should be con- sidered. However, little information exists on which to base an estimate, since most of the dairymen interviewed had not operated their tanks long enough to estimate what these ex- penses might amount to over the life of the tank. Some expense will be necessary eventually for repairing and replacing motors and other parts subject to wear and for complying with health regulations. It was assumed in Table 1 that an- nual expenses for these purposes plus additional expenses for taxes and insurance would average 4 percent of the total added investment. This amount includes allowance for replacing the cool- ing unit. The total added annual cost for converting to the bulk system of handling milk is computed by adding the annual depreciation and in- terest charges and the estimated annual expense for upkeep and repairs, and is shown in column 11 of Table 1. The total annual savings will be estimated next and compared with the annual costs. SAVINGS Estimated annual savings resulting from bulk tanks are shown in Table 2. They have been computed for the same levels of production as the data on annual costs shown in Table 1. The most important saving appears to be in hauling charges. Approximately one-half of the dairymen interviewed indicated that hauling charges after they had changed to the bulk system were 15 cents per hundredweight less than they had been under the can system. About one-fourth stated l! 2. ESTIMATED ANNUAL SAVINGS AT DIFFERENT LEVELS OF PRODUCTION IF DAIRY PRODUCERS SHIFTED TO BULK TANK HANDLING al ~ . . . . . Interest on Total Annual net A ual salfilngs $922395 5921x195 Siivéggs sazzlngs investment “firs; added difference .:vh°n hauling‘ wastage“ cans3 coolers‘ electricity“ eqgrillacgrelntfi savings Q2239 (gfévfifi; i211}; l) (2) (3) (4) (5) (5) (7) (3) (9) (10) i -ds — — -— —— — — — — — — Dollars — — —- -— — —— — — — — d, .000 135 45 16 30 4 13 243 274 —3l .000 202 68 24 39 5 17 355 277 78 v‘ .000 270 90 32 47 7 21 467 308 159 s, .000 338 112 39 55 9 24 577 359 218 .000 506 169 59 83 14 37 868 464 404 .000 675 225 79 83 18 39 1119 537 582 .000 844 281 98 118 22 54 1417 628 789 .000 1012 338 118 138 27 64 1697 t 676 1021 l .000 1181 394 138 167 32 77 1989 720 1269 .000 1350 450 158 197 36 90 2281 761 1520 ot the tank. ' t’ ing cans cost $10.50 each. and had a lite of 4 years. uming a lite oi 12 years. column l1 of Table 1. 'ng savings otl';f_15"cents per hundredweight calculated on the average annual production over the estimated l5-year lated at 1 percent oi average annual production over the 15-year lite period and valued at $5 per hundredweight. liming a savings oi 0.2 kilowatt-hours per 100 pounds at 2 cents per kilowatt-hour. ‘ ated at 6 percent on undepreciated balance of investment in cans and coolers. Figure 1. Until 1954, can trucks were the major means of transporting milk from the farm to the dairy plant. that the savings amounted to 20 cents per hundredweight while the remaining one-fourth indicated a savings of 10 cents. A saving in hauling of 15 cents per hundredweight is used in Table 2. A second major saving arises from reduced wastage of milk. Under the tank system, pay- ment to the producer is based on the volume of milk in his tank just before it is withdrawn. Under the can system, measurement of the volume sold is taken after the milk is dumped into the Weigh vat at the receiving station. Thus the producer underthe can system bears the losses arising from stickage to the can and spillage in handling. This loss varies considerably, depending partly on the way the milk is handled. Available data indicate that one can expect about 1 percent saving from less wastage. A savings in wastage of 1 percent of average annual production was used in this study; these savings-were valued at $5 per hundredweight (column 3, Table 2). Figure 2. The hauling charges generally are lower with tank trucks because larger loads can be handled. less labor is involved and the milk usually is picked up every other day rather than daily. 6 ~ Under the bulk system of handling milk, there a is no investment in milk cans and can coolers; Although savings in cans and can coolers are substantial, they are considerably less than the added annual investment involved in purchasing a bulk tank (columns 4 and 5, Table 2). In comput- g ing the annual savings in cans and can coolers, a useful life of 4 years for cans a-nd 12 years for ; can coolers is assumed. .1. Since this analysis applies to direct expansion type tanks, some slight savings may be expected : in electricity costs, but this difference would be‘ affected by the efficiency of the cooling units. There might be more savings where old and obsolete can equipment is replaced. Data from, the Department of Agricultural Engineering i indicate that on the average, a saving of 0.2 kilowatt-hours per 100 pounds of milk cooled can be expected when direct expansion type tanks are used. These savings were valued at cents per kilowatt (column '6, Table 2). Electricity? costs would probably be somewhat higher for the ice bank type tank. Some savings also would arise from interest on the capital which normally would be tied up, in can equipment (column 7, Table 2). These savings, however, would be smaller than the added cost of interest on tank equipment since investment is larger for tanks. Another source of saving with bulk tanks s might be that less time is required for cleaning. the equipment and handling the milk. Since the labor saved is slight, between 20 and 30 minutes a day, and it is questionable whether it would be used productively, no allowance is made for possible savings in labor in this analysis. Total annual savings (column 8, Table 2) are calculated by adding columns 2 through 7. A~ comparison of the total annual savings with the a added annual costs indicates how a typical dairy- man with the productivity indicated might be expected to fare with a bulk tank, if savings of 1 15 cents per hundredweight in hauling charges 5 continue and if the tank is used for 15 years. With these assumptions, the savings from tank eventually would pay for the added cost of switching to a bulk tank system if annual milk , production amounted to about 100,000 pounds. A With an annual production of only 80,000,. pounds, i a bulk tank would result in a net loss of $31 per 1i year. For farms with considerably larger produce ‘ tion, however, savings would exceed costs by a substantial amount. On a farm which had an j annual production of 300,000 pounds, for example, _ savings would exceed costs by an average of $404 per year, or a total of about $6,000 over the 15-year life of the tank. These differences are determined largely by the life of the tank and savings in hauling charges. The question arises as to how realistic the assumption is that a difference of 15 cents» per hundredweight in hauling may continue over i, 15-year life of the tank. Although about half the bulk tank producers in North Texas re- I ed this difference, there is no assurance that ‘ll continue indefinitely, even though available p: indicate that milk normally can be trans- 1 ed more cheaply in bulk trucks than in can cks. Since milk transporting in most cases is 1' e by contract haulers, the degree of competi- among haulers may be important in de- ining future hauling charges. 1 Although a 15-year life was assumed in the eding analysis, tanks have been used an in- ficient time to show life expectancy. Ob- scence may be a factor which would shorten ‘- useful period to less than 15 years. However, tanks themselves appear durable and if qolescence is not ‘important, perhaps a life use I eding 15 years could be expected. Table 3 jws the anticipated outcome with various as- 1 ptions regarding the life of the tank and dif- ences in hauling rates. Columns 2, 3 and 4, example, indicate what might be expected 1th a 10-year tank life and savings in hauling 10 cents, 15 cents and 20 cents per hundred- ight. Other columns indicate the calculated tcome with these differences in hauling costs 1th a tank life of 15 years and 20 years. ‘YFor columns 2, 3 and 4 of Table 3, where a tank e of 10 years is assumed, annual expenses for keep, repairs, taxes and insurance are cal- T ated at a rate of only 2 percent of total added ‘vestment. This is used instead of the 4 percent ate when a tank life of 15 or 20 years is assumed, ‘~ ce it is unlikely that the cooling unit would I d replacing within 10 years. With this excep- on, the method used in computing the data in _, able 3 is the same as the method used in Tables ‘I and 2. _, Table 3 indicates that a bulk tank will pay for "elf in time with an annual production of about 60,000 pounds or more, even if savings in haul- f, g amount to only 10 cents per hundredweight Total Estimated annual difference in annual favor of bulk tanks, assuming production tanks have a life of 10 years and ‘ now savings in hauling amount to: I Estimated annual difference in favor of bulk tanks, assuming tanks have a life of 15 years and savings in hauling amount to: TABLE 4. ESTIMATED NUMBER OF YEARS NEEDED FOR SAVINGS TO OFFSET COSTS OF CONVERTING TO A BULK TANK‘ Tqtql Savings in hauling per cwt. of annual production 10¢ 15¢ 20¢ Pounds -— — — — Years — — — -— 80,000 2 2 14 120,000 14 8 7 160,000 9 61/2 51/2 200,000 81/2 6 5 300,000 61/2 5 4 400,000 6 41/2 31/2 500,000 5 4 3 600,000 ' 41/2 31/2 21/2 700,000 4 3 21/2 800,000 ' 31/2 3 , 2 fTank life assumed to be 15 years. ‘The tank would never pay for itself at this level of produc- tion and with this savings in hauling. and if the tank lasts only 10 years. If annual production is much below 160,000 pounds, a larger savings in hauling or a longer life will be neces- sary for the tank to pay out. For the most favorable assumption (a tank life of 20 years and a savings in hauling of 20 cents) an annual production of about 75,000 pounds will be neces- sary. Table 3 shows the net differences between savings and additional costs averaged over the expected life of the tank. It does not indicate the time required for savings to equal additional costs. This is particularly important to dairymen and to lenders if credit is used to purchase the tank. The estimated number of years required for annual savings to equal the initial investment out- lay plus interest on investment and annual ex- penses for upkeep and repairs is given in Table 4. It is assumed in this table that the tank will be used for 15 years. ABLE 3. ESTIMATED ANNUAL DIFFERENCE IN FAVOR OF BULK TANKS WITH VARYING ASSUMPTIONS REGARDING ' THE LIFE OF THE TANK AND SAVINGS IN HAULING COSTS Estimated annual difference in tanks have a life of 20 years and savings in hauling amount to: 10¢ cwt. 15¢ cwt. 20¢ cwt. 10¢ cwt. 15¢ cwt. 20¢ cwt. 10¢ cwt. 15¢ cwt. 20¢ cwt. w = é (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) i, Pounds — — — — — — — — — Dollars — — — — — — — — _ - 80,000 _ -—107 —63 -19 -76 —31 14 —39 7 53 120,000 -- 21 45 111 11 78 146 50 119 118 160,000 32= 120 208 69 159 » 249 a 113 205 297 200,000 _ 63:. 173 283 105 218 328 149 274 389 300,000 1'77 342 507 236 404 574 303 476 648 Y 400,000 287 507 727 357 s. . 582 807 397 627 857 500,000 464 739 1014 507 789 1069 613 900 1188 2+ 600,000 633 963 1293 684 1021 1359 793 1138 1483 p , . 700,000 746 1131 1516 876 1269 1664 991 1394 1796 l, 800,000 920 1360 1800 1070 1520 1970 1197 1630 2117 favor of bulk tanks, assuming I Table 4 shows that several years would be re- quire-d for bulk tanks t0 be self-liquidating for many dairy producers. For example, a dairyman with an annual milk production of 80,000 pounds and a 15-cent saving in hauling would never be able to recover the costs of the tank from savings. If he had an annual production of 200,000 pounds, however, savings would offset costs in about 6 years, while with an annual production of 800,000 pounds the tank could be paid for out of savings in 3 years. By using the chart on the cover, one can de- termine the length of time needed for savings to offset additional costs at different levels of pro- duction and at different savings in hauling. It is assumed that the tank will last 15 years. Each curve, representing different savings in hauling . charges, shows the approximate number of years required for the tanks to be self-liquidating. For example, with an annual production of 200,000 pounds the tank would pay for itself in about 4% years with a savings in hauling of 20 cents per hundredweight. With savings in hauling of 15 cents, the tank would pay for itself in about 6 years, while slightly over 8 years would be re- quired with savings in hauling of 10 cents. The number of cows milked in attaining a given volume of production also is important. A dairyman with an annual production of 200,000 pounds, for instance, will be in a much stronger financial position if this is attained with 25 cows producing 8,000 pounds each rather than with 50 cows producing 4,000 pounds each. Good management will become increasingly important in the future in determining ability to obtain and repay credit and to operate a profitable business; a high quality herd usually is evidence of good management. FINANCING The high cost of bulk handling equipment means that many farmers must use credit if they purchase a tank. One of the objectives of this study is to find out if difficulty in obtaining credit is a major problem to Texas dairymen and also to find out the sources, cost and types of credit used. Approximately one-sixth of the tank owners interviewed paid cash for their bulk equipment (Table 5). This may appear to. be a large pro- portion of cash purchases for an adjustment re- quiring such a large capital expenditure; how- TABLE 5. PROPORTION OF DAIRYMEN WHO USED CREDIT IN PURCHASING BULK TANKS Item North Texas Corpus Christi area area Number Percent Number Percent Dairymen using credit 159 83.2 31 86.1 Dairymen paying all cash 32 16.8 5 13.9 Total 191 100.0 36 100.0 8 ever, it is probably influenced by a tendency fo the larger operators with more capital to mak adjustments of this type first. For instanc dairymen in North Texas who had purchased mil.» tanks averaged about 20 more cows in their milk ing herds and operated on the average about l. more acres of land than the dairymen who wer still using cans. This suggests that those r have yet to make the adjustment to bulk handlin 1.». may need to use more credit than the dairyme who have already purchased tanks, since =- smaller operators usually have less cash availabl for purchases of this size. This was shown in t North Texas survey where about one-third of t =_ dairymen who had herds of 70 cows or more pai cash as compared with only 8 percent of the dairy men who had herds of less than 40 cows. Ther was little or no indication, however, that inability to obtain credit was a major obstacle to the shif to bulk handling. None of the 179 can producer contacted indicated that they had tried to obtai financing and had been unable to do so. Th major obstacles appeared to be a reluctance to g into debt for this purpose and doubt that th adjustment would be economical. i The proportion of dairymen paying cash t‘ purchase pipelines was even larger than the pr; portion paying cash for bulk tanks. More tha one out of four, 28 percent, of those wh purchased pipelines paid cash. Capital require‘ ments for pipelines are somewhat smaller tha for bulk tanks, which probably accounted for th larger proportion of cash purchases. Expenses for barn and milkroom remodelin apparently was not a serious capital problem a} most dairymen. Many of them used their l; labor to do the remodeling and required capita» only to purchase materials. Of those who in a curred some expenses for barn and milkroom re v modeling, only about 5 percent used credit; remainder paid cash. Sources of Financing In the North Texas area, commercial banks- financed almost one-half, 47.8 percent, of the bulk tanks purchased on credit. Dealers wer the next major source in North Texas, accounting for a little over one-third of the credit purchases‘ (Table 6). It appeared, however, that dealers; played an even more active role than this figure might indicate. In some instances where they did not make the original loans themselves, they; arranged for the financing with a local bank. I -_. other instances, they made the original loan. o- conditional sales contract, later discounting or selling these to lending institutions. I The North Texas Producers Association- financed approximately 6 percent of the bulk tank purchases, with funds obtained through a 10a: from the Houston Bank for Cooperatives. Th production credit associations did not appear t‘ be active in financing this adjustment. They made only a small proportion of the loans, 4 per p which primarily were cases where the as- tions already were rendering other credit cces to the borrowers. This also appeared to y e of the Farmers’ Home Administration. cing by the national farm loan associations red to arise mainly in those cases where frsion to bulk handling was part of a general p improvement program. Milk handlers only a scattering of producers in North .= this was done by several of the companies were approaching 100 percent conversion to .rtanks among the dairymen selling milk to Where the financing was done by other rs, however, handlers guaranteed the pay- s. a hile commercial banks were the major e of credit in North Texas, they financed of the dairymen who were interviewed in Corpus Christi area. Dealers were the major e of credit in that area, and financed more tone-half, 58.1 percent, of the bulk tank Chases. Milk handlers financed most of the inder, other sources of credit being relatively 1 portant. In some instances, however, the filers who did the original financing apparent- ter discounted with lending institutions. Al- gh sources of credit in the Corpus Christi r apparently were somewhat more restricted in North Texas, none of the dairymen inter- ted indicated that they had encountered any ‘culty in financing. Payments gin North Texas, the most common practice to turn in the old can equipment as either payment or part down payment on the q hase price of a bulk tank. Nearly two-thirds, ercent, of the bulk tank operators in North s purchased a tank on this basis and over fifths, 42 percent, paid no cash above the e-in allowance. Usually the amount allowed old equipment ranged between 10 and 20 ‘ ent of the purchase price. About one-fifth, percent, of those purchasing a tank, however, her turned in old equipment nor made a cash payment; they borrowed the entire amount he purchase price. Each of the lending groups f some financing without down payments. >In the Corpus Christi area, old can equipment ally was not accepted in trade-in allowances ,3»: of the lack of a market for it. In this a, the usual procedure was for the producers imake a cash down payment—generally about ipercent of the purchase price—and borrow the a ainder. Approximately two-thirds of the bulk 'k operators purchased a tank on this basis. gut 17 percent purchased a tank with no cash payment, while the remainder paid all cash. crest Rates The most common rate of interest charged on k tanks purchased on, credit was 6 percent. proximately one-half of the credit purchases in rth Texas had this rate, while slightly over TABLE 6. SOURCES OF‘ CREDIT USED TO PURCHASE BULK TANKS Source Nortgrgxexas Corptéseghristi Number Percent Number Percent Local banks 76 47.8 0 0.0 Dealers 55 34.6 18 58.1 North Texas Producers Association 9 5.6 0 0.0 Production credit associations 6 3.8 1 3.2 Farmers Home Administration 5 3.1 1 3.2 Milk handlers 4 2.5 9 29.1 National farm loan associations 2 1.3 0 0.0 Other or not available 2 1.3 2 6.4 Total ' 159 100.0 31 100.0 one-fourth had a rate of 5 percent (Table 7). The 6 percent rate was most common for commercial banks, nearly two-thirds of their loans bearing this charge, as compared with about one-third of the purchases financed by dealers. The rate of interest in itself does not neces- sarily indicate the actual interest charge on a loan repaid in installments, however, since the rate may apply either to the full face amount for the entire life of the loan or to the unpaid balance only. If the interest rate is charged against the face amount of a 1-year loan with 12 monthly installments, for example, and charged for the full 12-month period, the charge will be almost twice as great as it would be if it applied only to the unpaid balance. In some instances where credit was used to purchase bulk tanks both in North Texas and in the Corpus Christi area, the interest charge evidently was applied to the full face amount of the sum borrowed. The proportion of such instances could not be Figure 3. Since a substantial additional investment is necessary for a shift to bulk handling, dairy farmers should consider carefully the savings and costs involved. If credit is required. one of the first things a dairyman should do is to discuss his plans with his regular lending agency. 9 TABLE 7. INTEREST RATES ON CREDIT USED TO FINANCE THE PURCHASE OF BULK TANKS Interest rate North Texas - Corpus Christi area area Percent Number Percent Number Percent Less than 4.0 4 2.5 0 0.0 4.0 - 4.9 11 6.9 0 0.0 5.0 - 5.9 46 28.9 6 19.4 6.0 - 6.9 76 47.8 9 29.0 7.0 - 7.9 2 1.3 4 12.9 8.0 and over 4 a 2.5 2 6.4 Not specified‘ 16 10.1 10 32.3 Total 159 100.0 31 100.0 ‘A number of these loans involved a carrying charge instead oi an interest charge. determined however, because in many cases the borrowers did not know if the interest charge was applied to the unpaid balance or the full face amount. In other words, the borrowers evidently had not determined the full cost of the credit they were using and did not know if they were using the cheapest source of financing. Carrying charges also were used in some instances as a means of charging interest on bulk tank purchases. This method involves the addition of an extra sum to the face amount of the loan. Typically, the use of carrying charges involves a higher interest cost than when a conventional loan is obtained. This method of charging interest was used infrequently in North Texas but accounted for nearly one-third of the credit purchases in the Corpus Christi area. Since the interest rate alone may not indicate full financing costs, dairymen may determine their true interest charges by using the follow- ing formula: Total finance charges No. of payments x 1/2 of original loan N0. of years 1 _' Actual annual NO_ of payments + 1 i rate 0f inl7€r€St The computation of interest charges by this formula may be illustrated by an actual case of TABLE 8. LENGTH OF REPAYMENT PERIODS FOR CREDIT USED TO FINANCE THE PURCHASE OF BULK TANKS Repayment North Texas Corpus Christi period area area Years Number Percent Number Percent Less than 1 3 1.9 0 0.0 1.0 - 1.9 15 9.5 1 3.2 2.0 - 2.9 l l1 6.9 0 0.0 3.0 - 3.9 87 54.7 26 83.9 4.0 - 4.9 14 8.8 1 3.2 5.0 - 5.9 15 9.4 2 6.5 6.0 and over 4 2.5 0 0.0 Open account 2 1.3 0 0.0 Not specified 8 5.0 1 3.2 Total 159 100.0 31 100.0 l0 a - dairyman in North Texas. This operato purchased a 400-gallon tank and a 40-gallon v: water heater at a total cost of $3,250. He w allowed a credit of $800 for old can equipmen leaving a balance due of $2,450. In his financi ' arrangement, which presumably involved a ra of 6 percent, he agreed to pay 36 monthly t. stallments of $79.60 each. {Thus his total ments over the 3-year period will amount ‘ $2,865.60 ($79.60 x 36 I $2,865.60). The to : finance charges will therefore be $415. ($2,865.60 — $2,450 I $415.60). Substituti these figures in the preceding formula give $415.60 36 1 _$14,961.60 __- $1,225 X 3 X E “I $155,975.00 Thus, this dairyman was paying an actual inter charge of 11.0 percent instead of the 6 perce, rate indicated in his note. ~ £ I 11.0 percent Repayment Conditions In North Texas, the usual length of repayme period on bulk tank credit transactions was‘ years, over one-half, 55 percent, of the loans be ing this term (Table 8). While both commerd banks and dealers did most of their financing r the basis of 3-year terms, there were significa‘ differences in the frequency with which the made longer term loans. Commercial ban :1 seldom made a loan with a term of more than years; loans not written with terms of 3 ye, were written with terms of 1 or 2 years. Whe‘ the loans were made with the shorter terms, ho ever, there was usually an understanding th they would be renewed if the borrowers show good faith. Dealers rarely made a loan for le than 3 years, while approximately one-third we made with terms of 4 or 5 years. In the Corp _ Christi area, the 3-year term was even m0 prevalent than in North Texas and more tha four-fifths, 84 percent, of all financing was y this basis. i About nine-tenths of the loans provided f monthly repayments, usually deducted direct from the milk check. Usually the repayme, terms called for the payment of a stipulated s, ’ each month, although in some cases there we provisions for a larger sum to be paid if m’ production exceeded a specified volume. Anoth method of repayment less frequently used was t provision of a stipulated sum to be deducted ~. hundredweight of milk sold. Thus, the amount repayment varied with the volume of m‘, marketed. i Recommendations The following recommendations based on t findings in this study may be helpful in consid ing the use of credit to purchase a bulk tank: 1. Adapt the information in Tables 1, 2, 3 a 4 to individual farm conditions. It will indic how profitable a bulk tank may be on your fa t lvConsider the length of time that you plan “rain in dairying. If you plan to sell out 1 a few years, you may have difficultyoin lring the full undepreciated balance of the H; se price. if Discuss your credit problems with your Jr lending agency first if you plan to use 1 to purchase a bulk tank. ?.It usually is a good policy to do all your j ing through one agency. This practice has l advantages: it gives the agency a better i‘ unity to become thoroughly familiar with farming operations and financial problems; i eases their confidence in your integrity and cfaith; and, consequently, they may be more ';tto extend you credit through periods of _ 1 y. < If you do finance the purchase of a bulk i-rthrough another credit source, be sure to let fregular credit agency know. By not keeping Fagency fully informed of all financial obliga- j," you might increase your difficulties for i financing. l-Know your financing costs. If you are un- in of the actual interest charge, use the J la in the section on “Interest Rates.” Consider whether the purchase of a bulk iiis the most profitable use for your capital. same amount of money spent in improving creasing the dairy herd or in pasture im- fment, for instance, may bring higher re- If this is true, it would mean more money u to delay the purchase of a tank and put the fy to more profitable uses. _.~ Take the quality of the dairy herd in con- 'tion. This is particularly important if the 1» e of production is so small that a long period j e is required for savings to offset costs. a en with poor producing animals will have Y» more difficulty in meeting family living and ‘ting expenses and in paying off expensive ment than will those with high producing Y: s. ACKNOWLEDGMENTS ppreciation is expressed to the management ’ e North Texas Producers Association of gton and the Coastal Bend Milk Producers iation of Corpus Christi for their coopera- in this study. l e help given by the North Texas Milk Administrator’s Office in furnishing uction and marketing data for, the North I = area is gratefully acknowledged. Special acknowledgment is made to the dairy producers who cooperated with this study. Data for this study were obtained with the help of funds contributed by the Southern Regional Farm Management Project S-27, “An Economic Evaluation of Forage Production and Use on Beef and Dairy Farms.” REFERENCES 1. Agnew, Donald B., How Bulk Assembly Changes Milk Marketing Costs, Marketing Research Report No. 190, USDA, AMS, July 1957. 2. Baker, T. A., McDaniel, W. E., and Bondurant, B. L., Milk Handling, Can or Bulk Tank, Delaware Agri- cultural Experiment Station, Circular No. 29, 1954. 3. Bortfeld, C. F., Kelly, P. L. and Davis, V. E., Cost of Operating Bulk Milk Tanks on Kansas Farms, Kansas Agricultural Experiment Station, Bulletin 383, November 1956. 4. Baum, E. L., Riley, R. D. and Weeks, E. E., Economics of Scale in Operation of Can and Tank Milk Receiving Rooms with Special Reference to Western Washing- ton, Washington Agricultural Experiment Station, Technical Bulletin No. 12, May 1954. 5. Baum, E. L. and Pauls, D. E., Comparative Analysis of Costs of Farm Collection of Milk by Can and Tank in Western Washington, Washington Experi- ment Station Technical Bulletin No. 10, May, 1953. 6. Cowden, J. M., Farm to Plant Bulk and Can Hauling Costs, Report No. 18, USDA, Farmer Co-op Service, 1956. 7. Cowden, J. M., Bulk Handling in 1955, Report No. 22, USDA, U. S. Farmer Co-op Service, 1956. 8. Dankers, W. H. and Olson, F. L., What Shall It Be, Bulk Tanks or Cans?, Minnesota Agricultural Ex- tension Service, 1955. 9. Davis, C. 0., “Bulk Pick up Financing Plan,” Milk Plant Monthly 44 (5): 23-24, May 1955. 10. Henderson, A. S. and Cowan, R., “Bulk Hauling—Its Cost Problems, Its Savings”, Milk Plant Monthly 45 (5): 18-19, 41-42, May 1956. 11. Johnson, P. E., Olson, H. C. and Von Gunten, R. L., Comparison of Bulk and Can Systems for Handling Milk on Farms, Oklahoma Agricultural Experiment Station, Bulletin 436, 1954. 12. Morris, W. H., March, R. P., White, V. C., and Turner, C. H., Bulk Cooling and Storage of Milk on the Farm, Cornell Extension Bulletin No. 899, 1954. 13. Nelson, Glen T., Economic Aspects of Farm Tank Handling of Milk in Oregon, Oregon Agricultural Experiment Station Circular No. 520, 1953. 14. Preston, H. J ., Butterfat Sampling in Bulk Handling and Comparative Milk Solids Losses, General Report No. 10, USDA, U. S. Farmer Co-op Service, 1954. 15. Schabel, R., “Bulk Tank Financing," Banking 32 (10): 72, 103-104, April 1955. 16. Sinclair, R. 0., Economic Effect of Bulk Milk Handling in Vermont, Vermont Agricultural Experi- ment Station Bulletin 581, 1955. ll Location oi field research units oi the Texas Agricultural Experiment Station and cooperating agencies IN THE MAIN STATION, with headquarters at College Station, are 16 subj A matter departments, 2 service departments, 3 regulatory services and , administrative staff. Located out in the major agricultural areas of Texas ~ 21 substations and 9 fieldlaboratories. In addition, there are 14- cooperath Cooperating agencies include the Te orest Service, Game and Fish Commission of Texas, Texas Prison Systl U. S. Department oi Agriculture, University of Texas, Texas Technologi y, College, Texas College of Arts and Industries and the King Ranch. so" experiments are conducted on farms and ranches and in rural homes. ORGANIZATION stations owned by other agencies. THE TEXAS STATION is conducting about 400 active research projects, grou f’ in 25 programs, which include all phases of agriculture in Texas. Amok, these are: Conservation and improvement oi soil Conservation and use of water Grasses and legumes Grain crops Cotton and other fiber crops Vegetable crops Citrus and other subtropical fruits Fruits and nuts Oil seed crops Ornamental plants Brush and weeds Insects OPERATION Plant diseases Two additional programs are maintenance and upkeep, and central servic State-wide Research The Texas Agricultural Experiment Statiorr is the public agricultural research agency‘ I f oi the State oi Texas, and is one oi ten I parts oi the Texas A