Get a Handle on Machinery Costs04/28/2015
Owning farm equipment provides pride, convenience and even tax write-offs. It also costs more.
“Equipment cost is the second-largest line item expense for most grain producers next to land,” says Chris Barron, Top Producer columnist and Iowa farmer.
Several years of high crop profits resulted in new paint or machinery upgrades for many farmers. Now, some farmers have more equipment than they need.
Underusing machinery minimizes return on investment, says Ron LeMay, chairman and CEO of FarmLink. The average annual equipment utilization rates are:
- Combine: 7%
- Planter: 10%
- Sprayer: 15%
- Tractor: 17%
Factories view equipment as a necessary cost to manufacture high-quality products, Barron notes. “The goal is to produce as much as possible with a given machine, thereby lowering the cost of production,” he says. “If a machine costs $100,000 and operates 50% of the time, their cost has the potential to improve by 50%.”
Farmers should look at their machinery fleet the same way. Barron suggests asking: What percentage of the time do your machines operate in-season? How much more could your equipment do operating 22 to 24 hours a day?
“You might significantly lower per-acre equipment cost by reviewing performance and asking basic questions,” he says.
With tighter profit margins, it’s important to “right size” equipment to acreage. “If you have excess machinery, sell it,” says Moe Russell, Farm Journal columnist and president of Russell Consulting Group.
Be sure to consult your accountant about any tax implications. “If you took Section 179 depreciation, you will have to recapture that depreciation,” he says.
Instead of owning farm machinery outright, consider custom hiring work, leasing or jointly owning equipment. The decision to lease or custom hire should be backed by financial calculations, Russell advises. After you determine your current machinery costs (see “How to Calculate Your Machinery Costs” below), then you can accurately weigh all of your machinery ownership options.
“We’re seeing a lot more leasing, particularly of combines, because you transfer that fixed cost to a variable cost, which reduces risk,” Russell says. He’s also a fan of custom hiring some tasks. “In a lot of cases, you can get custom work done cheaper than if you own the equipment,” he adds.
How to Calculate Your Machinery Costs
Many farmers don’t constantly track their machinery costs, says Moe Russell, Farm Journal columnist and president of Russell Consulting Group. As a result, he sees per-acre machinery costs from $44 to $400.
To calculate your annual machinery cost per acre, Chris Barron, Top Producer columnist and Iowa farmer, provides an easy formula (see below). Once you’ve determined that figure, take it a step further and factor in your fuel, labor, GPS subscriptions, etc.
- Add up your total equipment value. Ensure your numbers accurately represent each machine. Ask your local equipment dealer to review your market value estimates.
- Tally your total acres of operation (include all of the acres you farm plus any custom work).
- Include a standard annual ownership cost. The general standard is 25% of your total machine value. This 25% is comprised of 10% interest or opportunity cost, 10% depreciation and 5% repairs. (If you have older machinery, your repairs might be higher, but depreciation would be lower.)
For example, a farmer has 1,000 acres and a total machinery value of $450,000. Plug those numbers into this equation:
(Total Equipment Value) / (Total Acres Farmed) = _______x (Annual Ownership %) = Annual Machinery Cost Per Acre
$450,000/1,000 = $450.00 x 0.25 = $112.50
Source: Sara Schafer, Farm Journal