Profit from milling wheat into flour

Farmers who mill their grain usually find milling is more profitable than farming.

This page examines the profits that are possible for an enterprise that adds value to some of the farm's grain.

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Caution: I would do careful planning before putting my hard-earned cash into any project, including one such as this. These figures are to give you the general idea rather than to indicate any profit you will make. They are rough figures based on real farmers' real figures. These farmers may

have advantages that you don't
be in different market niches even to their neighbors and
have different ways of working, living and handling their finances.

The figures happen to be for organic farmers milling their own organic grains and/or milling grains from other organic farmers.

This is because it is easier to add value when your product is differentiated already. It need not be organic, but it is better if the product is not the same as thousands of other farmers' products.

For example, you may be producing

Buffalo, deer, kangaroo, crocodile or alligator meat rather than beef or pork
spelt, malting barley or quinoa rather than wheat
free-range eggs rather than cage eggs
durum wheat for pasta rather than bread wheat, feed wheat or biscuit wheat
an unusual variety of vegetable or fruit for a specialty market
heirloom vegetables, fruits or even animals
baby vegetables (baby beets etc), pre-mixed salads, prepared meals or any other product that better fits today's lifestyles, particularly those of people with high income and little time.

See also how you can Add value to double your farm profit

In assessing the profitability of milling wheat, I had to make various assumptions about prices, demand, running costs and so on. These vary over time and from place to place. This is why the figures are indicators only. Obviously your situation is quite different even if you are a neighbor of one of the farmers who assisted me in developing these figures.

The mill and its buildings take time to build and assemble, but I have not allowed for that so that I can keep the example simple.

I set out to show this in a realistic light in terms of interest rates, wheat prices and selling price for organic flour. I believe the figures are within the typical range and may be very different in any one year. They are based on eastern Australian situations at various times in recent years.

Times can be far worse. And will be, for some farmers in some years in some places.

1 tonne = 1 t = 1,000 kg or about 2200 pounds. A tonne is essentially the same as a normal British or USA ton. 1 kilogram is about 2.2 pounds.

A stone mill to handle 40-50 kg (about a hundredweight) of wheat an hour (about 1 t/day or 350-438 t a year, assuming no downtime) can be bought for less than $10,000.

Allow $30,000 to buy a 100 tonne sealed white silo, put the flour mill in a small rodent-proof building and meet local health regulations. This includes connecting power and supplying minor equipment such as a bag sewing machine. I assume the family has an auger or other way to fill the silo and transfer the grain from the silo to the flour mill's hopper.

Table 1: Mill establishment costs
Item	Cost
Buy flour mill	$10,000
Build and equip shed or barn and silo	$30,000
Total cost of setting up	$40,000

This gives a capital investment of $40,000. See Table 1: Mill establishment costs.

Although the mill can handle 350 or more tonnes a year, the family prefers not to run the mill full time. They mill about a third of the time, producing 100 t/year.

This mill needs little attention once it is set up. It needs to be checked about once an hour and takes little maintenance. The two adults in the family take turns at keeping an eye on the mill to fit around the varying workload each has. I have not costed in any labor.

Because it is wholemeal flour, there are virtually no losses in the milling, 1 t in gives 1 t out. Many of their customers prefer wholemeal or almost wholemeal flour. And even when there is "waste" in the form of bran, there is a good market for it at a good price, mainly because they are certified organic.

Table 2: Farmgate prices for this example
Product	$/tonne
Organic wheat	$360
Organic flour in 5 kg bags wholesale/tonne	$1,000
Price difference for flour compared with organic wheat	$640

They sell to a wholesaler and direct to some retailers in 5 kg (11 pounds) cloth bags with their brand and farm mill details printed attractively on the front. The wholesaler and the retailers pay $5/bag or $1,000/t.

If we subtract what the family could get for the unmilled organic wheat, $360/t, this leaves an increased return from milling of $640/t for the flour compared with the family's wheat. See Table 2: Farmgate prices for this example

Table 3: Extra income from milling
Tonnes milled per year	100
Margin/t for flour over wheat	$640
Extra income from milling/year	$64,000

The family has increased the gross income by $640 a tonne and that brings in 100 times $640 or $64,000. See Table 3: Extra income from milling

Table 4: Operating costs of milling in year 1
Item	Total $ for year
Power, bags, transport $240/tonne	$24,000
Interest on capital	$6,000
Total Year 1 running cost	$30,000

The running, transport and power costs are $120/t, the cost of bags is $120/t for a total of $240/t or $24,000 for their 100 tonnes of wheat milled in a year.

The interest cost (at 15% on $40,000) to establish the mill would be $6,000 for a year.

Add the bags, the running and power costs to the interest cost for a total running cost for Year 1 of $30,000. Note: This does not include the $40,000 capital cost. See Table 4: Operating costs of milling in year 1

Table 5: First year's milling returns
Item	Total $ for year
Increased income	$64,000
Total capital investment	$40,000
Mill running costs	$24,000
Interest	$6,000
Total cost, including capital	$70,000
Net at end of the first year	$-6,000

Note: Numbers with a minus sign in front of them are negative numbers, they indicate a loss rather than a profit.

After one year and after repaying some of the capital and paying all of the first year's running costs, the family is $6,000 worse off than at the start of the year.

This includes paying interest on the capital costs, less the first year's return.

Note: I have assumed that the loan is repaid as the money comes in. This is a big assumption, but this makes the figures a lot easier to understand and allows you to focus on the overall picture. See Table 5: First year's milling returns

Table 6: Second year's milling returns
Item	Total $ for year
Increased income	$64,000
Mill running costs	$24,000
Net profit on Year 2 only	$40,000
Year 1 loss	$-6,000
Interest payable in Year 2 on Year 1 shortfall	$-900
Net at end of second year after paying out Year 1 loss	$33,100

In the second year the family would pay $900 interest on the first year's loss. Remember that I have assumed that the family repaid the loan as soon as the income came in.

At the end of the second year the family has paid all startup and running costs and is $33,100 ahead overall. See Table 6: Second year's milling returns

Table 7: Milling return for each year from Year 3 on
Item	Total $ for year
Increased income	$64,000
Running costs, no interest	$24,000
Net each year after first two	$40,000

After the end of Year 2 there are no more interest bills. So each year the family has an increased gross income of $64,000 with running costs of $24,000, leaving them with a $40,000 profit. See Table 7: Milling return for each year from Year 3 on

Even if the economics change considerably, this family will probably still have an excellent investment.

And this is on a throughput of only 100 tonnes. The family could easily

buy a larger mill for not much more upfront and get a greater hourly production
run the existing mill for six more hours a week to add around $6000 profit a year.
widen their range to include higher-value products such as buckwheat and spelt flour to increase their profit and customer dedication

Compare this with your farm. You will probably find the return on this investment is better than from a similar amount of money, resources and time put into farm inputs, livestock, farming equipment or land.

The bar chart shows the yearly cashflow and profit from milling wheat into flour. Cashflow for an investment in processing - an on-farm flour mill. Profit
from milling wheat into flour

Cashflow for an investment in processing - an on-farm flour mill. Profit
from milling wheat into flour

The cashflow would be worse on a monthly basis than on the yearly basis shown here.

For example, if they did not borrow the capital to set the mill up (many farmers prefer not to borrow if possible), their peak shortfall would be in the early part of the first year of full operation and would be around $60,000. This is shown by the deep drop in the "Peak" (meaning peak shortfall) bar at the beginning of the above chart. The shortfall only dips to that degree for a short time until the cash begins to flow in from flour sales.

If they chose not to borrow and used their own accumulated reserves, the interest cost would be different. They would need to consider what interest if any, that money would bring them elsewhere. This is an opportunity cost.

If they did borrow the money to establish the mill, as assumed in this example, they would owe this money, but it would not have the same impact on their cashflow because the money would flow from the bank direct to the people who supplied the mill and the building materials etc. However, there would be interest to pay and this has been allowed for in this example.

You can see from this example of milling wheat into flour that a value adding investment need not be large.

Thank you
I would like to thank all the farmers and processors who generously gave me time and information, in particular David Williams, Heidi Halter and Arthur Dakin for their generous help in putting together the real costs of value adding. Not only have they helped me with this project over the years, for decades they have sold me the most wonderful organic flour and other dry goods - Michael

Related info:

Add value to double your farm profit

For any value adding operation that includes any potential for a risk (real or as perceived by one of your customers), it is worth looking into Hazard Analysis & Critical Control Points (HACCP) to reduce the risk and better manage any complications.

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This page was updated on December 27, 2007