Economic aspects of drying

The use of mechanical drying systems offers so many advantages over sun drying like maintenance of paddy quality, safe drying during rain and at night, increased capacity, easy control of drying parameters and the potential for saving on labor cost that it is surprising that so few mechanical dryers are being used. Various studies have therefore focused on the factors that led to the failure of introduction of numerous drying systems.

The constraints can be grouped under headers related to technology, know-how, post-production system, management and economics. Technology can be developed, know-how and management related issues can be addressed through capacity building measures, and post harvest system related problems can be taken care of by choosing the right technology options.

However, with respect to economics drying faces a problem, which is unique for post-production operations, namely the availability of sun drying as a simple and very inexpensive alternative. In most cases pure economics therefore become the limiting factor for the introduction of mechanical drying systems.

This chapter does not elaborate in detail on how to conduct an economic assessment but points out some of the important considerations that have to be taken into account when doing a site-specific assessment on the potential of mechanical drying.

1. Potential Economic Benefits from Drying

Depending on the prevailing frame conditions and the postharvest system the use of mechanical dryers might provide the following economic benefits:

Overview on potential economic benefits from mechanical drying, pre-conditions for realizing those, and constraints.

2. Weight Loss in Drying

During the drying process water is removed from the grains (see Section 3.1). That means that after drying there is fewer paddy to sell since in most markets paddy is traded on a weight basis. In markets, where paddy is still traded on a volume basis there is a similar effect since paddy shrinks in volume during drying also.

Example:

100 kg paddy with an initial MC of 28% are dried to 14%. The weight after drying is only 83.7 kg. This means that the person who does the drying needs to get around 20% higher price for the dried paddy in order to compensate for the loss in weight.

3. Cost of Drying

Studies conducted in Thailand and Cambodia showed that the cost of drying in both countries is equivalent to 4% of the total paddy production cost. All the dryers that were successfully commercialized in Vietnam have drying cost with less than 5% of the paddy value. Case studies in other Asian countries indicate that mechanical dryers with cost higher than 5% of the paddy value cannot be introduced successfully. There is no point in listing cost numbers for different drying systems here since drying cost depend in many site specific factors and a “business plan” including a cost-benefit calculation has to be conducted for each individual drying system considering the conditions of the locality.

Drying cost are composed of fixed cost consisting of depreciation, cost of interest, repair cost, and opportunity cost, and of variable costs consisting mainly of fuel, labor, and electricity costs. Depending on the purpose of the drying cost calculation drying cost can either be stated as annual cost or as cost per unit of weight. If the assessment is done to compare the dryer with other drying systems, e.g. with sun drying, the cost per unit of weight is more appropriate, if the drying system is evaluated as part of the whole postharvest system annual cost figures might be more feasible. In the following the cost is referred to one metric ton of dried paddy.

Total drying cost are composed of two components: fixed cost and variable cost.

To determine the drying cost three steps are necessary:

1. Define realistic assumptions
2. Determine variable cost
3. Determine the fixed cost component

A. Assumptions

Defining realistic assumptions prove to be the most difficult part in the drying cost calculation because it requires a sound understanding of the postharvest system that the dryer is operating in.

Example for general assumptions for drying cost calculations (based on Philippines data, 1994.)

The assumptions are also often misused to “fine-tune” the drying cost calculation in order to come up with positive figures. The most critical assumption is the machine utilization, which is the major determinant in the fixed cost. Denying the fact that sundrying is a cheaper alternative to machine use usually is still practiced whenever the weather is favorable, too high figures for utilization are used resulting in low drying cost, which then cannot be reached in actual operation.

A properly done economic feasibility study should therefore include both sets of data. For the optimum and for more realistic utilization data based on existing practices in order to demonstrate to the users of the technology that they need to maximize its use in order to keep cost down.

B. Variable costs

The variable cost (or operating cost) consist of the cost items that only occur when the dryer is actually being operated, namely cost for labor, fuel, electricity and potentially some other minor cost items. Variable cost is often wrongly referred to as drying cost because these are the cost most obvious to the user.

Cost of energy. For the fuels used in the air heater and in some cases for the engine that is driving the fan:

For the electric components:

C. Fixed cost

The fixed cost consists mainly of investment costs for a system and depends highly on dryer capacity, state of technology and local content. The use of an existing structure, for example, can reduce installation costs significantly. Therefore the installation cost has to be determined for every target area.

Depreciation

For simplicity a linear depreciation is used. Usually a salvage value is used in the calculation of the depreciation but in many cases this is not realistic since dryers typically are used in one location until they fall apart.

Cost of repair

A certain budget needs to be allocated to maintenance and repair needs. Based on manufacturers’ recommendations this can be expressed in percentage of investment.

Cost of interest

The cost of interest averaged over the years is:

(Other Economic Indicators)

Break-even Point

The break-even point in batches per year can be calculated as follows:

Benefit-Cost Ratio

The benefit-cost ratio (BCR) is the ratio of the gross benefits divided by the initial investment costs plus the costs of operation. For an investment to be worthwhile, BCR should be greater than one to indicate that the investor is recovering every dollar's worth of his investment. Conversely, a BCR less than one implies that at the assumed interest rate, the investment being evaluated is not profitable. The benefit-cost ratio (BCR) is computed as:

4. Conclusions for Economic Feasibility Studies

Considering the issues in the last two sections the following recommendations for economic analyses of mechanical drying can be made:

Investing in a dryer for saving the crop will hardly lead to break-even. The problem is that in this case the fixed cost component of the drying cost (depreciation) per batch is very high because the dryer is only used in emergency, meaning a few times a year. A dryer used only in emergency cannot be used economically.

Realistic data should be used for the annual dryer utilization considering alternatives like the option to sun dry during good weather.

The price difference for wet and dry paddy needs to be sufficient to compensate for: the cost of drying; for the weight loss that occurs during drying; and to provide some profit for the operation.