Consider These Air Permitting and Contract Issues Before Beginning Construction or Signing on the Dotted Line

With corn prices projected to be at near record highs this fall, and corn futures already hitting a record high this summer, more and more farmers are considering installing or expanding their own on-site storage facilities or contracting with a third party for off-farm storage. Both storage options provide growers with an additional risk management tool and more flexibility in marketing their corn crop. However, before moving ahead, there are a few considerations that farmers should think about before building grain storage or entering into a storage contract. 

Air Permitting & Performance Requirements for Corn Drying and Storage Facilities

If you are considering building an on-site corn drying and storage facility, you are likely reviewing building plans, getting cost estimates and figuring out which building permits and local ordinances apply to your proposed facility. What you may not immediately realize is that in Wisconsin, and in several other states, most large grain storage facilities require state air permits for both constructing and operating the facilities.

Construction and Operation Permits

Every new or modified air contaminant source, including grain storage and processing facilities, is required to obtain a construction and an operation permit unless the facility is exempt.  Exempt facilities are:

• Grain storage facilities, including facilities with column dryers or rack dryers, that receive less than 5,500 tons of grain per month, on average; and,
• Grain processing facilities, including facilities with column dryers or rack dryers, that receive less than 4,500 tons of grain per month, on average.  NR 407.03(a)(ce), (cm) (the average is calculated by dividing the cumulative tonnage of grain received in a calendar year by 12).

The exemption to obtain a construction and operation permit only applies if the grain storage and processing facilities are (i) not otherwise subject to state or federal new source performance standards (“NSPS”) and/or (ii) do not qualify as a part 70 source [a part 70 source has the potential to emit more than 100 tons per year of a criteria air pollutant (such as particulate matter) or which otherwise fits the definition of a “major source” as defined in NR 407.02(4)].

Importantly, a construction air permit must be obtained prior to commencing construction or modification of your grain operation (unless otherwise exempt). You can enter into contracts and hire contractors before receiving a construction air permit. However, you cannot undertake any physical activity of a permanent nature, including installation of foundations, without a permit.  Constructing before receiving the appropriate permit is a common violation enforced by the Wisconsin Department of Natural Resources (“WDNR”), the U.S. Environmental Protection Agency (“EPA”) and environmental groups. The maximum penalty for such a violation can be $37,500 per day without the permit, although actually fines tend to be much less.

Adding capacity to an existing grain storage and processing facility can also trigger construction permitting requirements. If adding capacity causes an otherwise exempt facility to exceed the storage and processing permitting thresholds, a permitting obligation may be triggered.  

In addition, WDNR may require you to aggregate the grain storage and processing capacity of geographically dispersed facilities when determining whether you qualify for the permit storage and processing exemption thresholds. For example, you may own or operate multiple grain storage and processing facilities at different locations. WDNR may require these dispersed facilities to be considered one single operation for purposes of determining whether they meet the permit exemption thresholds. This issue can also arise in “condo storage” arrangements, discussed below.

New Source Performance Standards

There is a specific NSPS standard under Wisconsin’s Administrative Code that applies to grain storage elevators and grain terminal elevators. See NR 440.47. Specifically:

• A “grain storage elevator” is any grain elevator (where grain is unloaded, handled, cleaned, dried, stored or loaded) located at any wheat flour mill, wet corn mill, dry corn mill (human consumption), rice mill or soybean oil extraction plant that has a permanent grain storage capacity of approximately one million bushels. See NR 440.47(2)(h). 
• A “grain terminal elevator” is any grain elevator which has a permanent storage capacity of more than 2.5 million U.S. bushels, except for those grain elevators located at animal food manufacturers, pet food manufacturers, cereal manufacturers, breweries and livestock feedlots.  NR 440.47(2)(i).

If you own or operate either a “grain storage elevator” or a “grain terminal elevator,” the facilities are regulated by NSPS standards.  NSPS standards require that each facility (truck loading and unloading stations, grain dryer, and all grain handling operations) meet certain standards for particulate matter, including specific opacity and fugitive emission levels. See NR 440.47(3).

Think Before You Construct

If you own grain storage or a processing elevator that is not exempt from the construction and operation permit requirements, you must comply with DNR’s air permitting requirements. If you own a grain storage or terminal elevator that is subject to the state’s NSPS, your facility will be required to achieve the NSPS performance standards.

If your facility will require an air permit, you should consider, among other things:
 

• Timing: Although the construction and operation permits are considered concurrently by the WDNR, the length of time it takes for a final permit to be issued varies based on the size, location and type of source.  After the completed permit application is submitted to WDNR, the agency has to review the application, make a preliminary determination regarding the applicable emission limitations and operational controls, make the application available for public review and comment, hold a hearing if one is requested, and then make a final determination. Because the final construction permit must be obtained before constructing the facility, an operator should know well in advance whether a permit is needed and then submit a comprehensive application in a timely manner.  
   
• Compliance Costs: Include in your budget planning the cost of complying with an air permit or NSPS standards (costs of technology, monitoring equipment, data gathering costs, recordkeeping, etc.), including the operation and maintenance costs that will accrue over time.
   
• Modeling of Air Emissions: As part of the air permitting process, WDNR will model your facility’s allowable air emissions to ensure that the operation will not cause unacceptable concentrations of air pollution. This modeling analysis can take considerable time to complete and can result in additional emission limitations being imposed on your operation. 

Further, even if you think your facility is exempt from the construction and operation permit requirements, you must document that the facility qualifies for the exemption. Specifically, you must record the tons of grain received at the grain storage or processing facility per month for five years, beginning on the day the facility begins operation. See NR 407.03(4)(a).

Contracting Issues in Off-Farm Storage Options

Depending on your farm’s size, it may be more economical to consider off-farm storage options instead of incurring the costs of building, permitting and maintaining on-farm storage. Mid-size or smaller farms, especially those in an area with multiple grain farms nearby, have been turning to condominium (“condo”) storage as an alternative to the higher investment costs of on-farm storage.

Condo storage can be structured several different ways. Two approaches are either 1) the storage is owned by a limited liability corporation (“LLC”) which the farmer buys into, or 2) the storage is built and owned by an elevator and leased back to the farmer(s) for a period of time.

LLC Structure

An LLC - structured condo storage arrangement allows farmers to buy shares in the LLC and receive rights in the storage in proportion to the amount of share (“Capital”) the farmer provided to the LLC. The storage structure itself is owned by the LLC, not the farmer, which provides the farmers with some protection of their personal assets. The LLC depreciates the grain structure and passes the depreciation back to the LLC owners. The LLC structure can continue for various lengths of time and members of the LLC may also be allowed to sublet, within limited sublet election time frames. In this scenario, the LLC would responsible for complying with any state or federal air permit requirements.

Leasing Option

A long-term leasing option is another approach that farmers sometimes rely on for storage.  In this, the elevator constructs the storage and interested farmers sign a long-term lease agreement (i.e. 10-15 years) to reserve storage space at the elevator. The elevator charges a lease cost that is structured for the elevator to recover construction costs within about 4-6 years.  After the construction cost is paid, the farmer is only responsible for paying a management fee.  After the lease term is expired, control of the storage is returned to the elevator owner and the elevator is allowed to depreciate the facility. In this scenario, the lessor (“elevator”) is responsible for complying with any state or federal air permit requirements. The storage leasing option became less beneficial to farmers when the Internal Revenue Service issued a ruling that prohibits farms from deducting the lease cost as an expense.

Storage Considerations

With both off-farm storage options, the elevator manages the producer’s inventory and guarantees grade and quality factors.  Often the elevator also merchandises the grain when it is sold. Most agreements allow producers to remove the grain for an “out charge” to cover handling costs. Elevators usually charge a per bushel management fee for the capacity owned by each farmer, whether utilized or not. Management fees and other charges (quality assurances, taxes, insurance, etc.) are typically charged annually, as well as on a per bushel basis. 

Going Forward

As you consider how to manage your corn production this year, consider issues related to permitting and contractual limitations sooner, rather than later. The penalties (and business risks) associated with violating state or federal air regulations and/or permits are significant and can have a severe impact on your ability to manage your production. Likewise, the contractual terms of your condo storage agreement, or a different type of storage agreement, could similarly restrict your ability to successfully market your crop.