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Keeping Machinery Costs in Check

April 27, 2013
By: Nate Birt, Top Producer Deputy Managing Editor
 
 

Profitable farms keep machinery costs in check

On the heels of an extreme drought year and yo-yo prices, controlling costs is a full-time job. The good news is that close management of machinery (power) costs is one of the best ways to maximize your competitive edge.

"There is a really big difference in power costs between farms that earn the top 25% in returns or profits versus the farms that are classified in the bottom 25%," says Nick Paulson, assistant professor in the agricultural and consumer economics department at the University of Illinois.

According to data from the Illinois Farm Business Farm Management Association, in 2011, Illinois farms with the highest returns had less than $110 per acre invested in machinery, on average. Those with the lowest returns had machinery costs nearing $150 per acre. A similar trend appears each year dating back to 1995, when the highest-return farms saw an average machinery cost of $35 per acre compared with $60 per acre for the lowest-return farms.

"If you want to add power cost to a farm, oversize your combine ... and have more tractors than you need," says Gary Schnitkey, a University of Illinois professor and Extension farm management specialist.

Right in line. As a rule of thumb, farmers should keep machinery costs at or below $100 per acre, says Bret Oelke, agricultural business management Extension educator at the University of Minnesota. To calculate per-acre costs, he says to average your annual maintenance costs and machinery payments during the past three years. Add a standard 10% machinery replacement rate and then divide that figure by total tillable acres.

At the same time, the resulting figure should be gauged based on crop, local conditions and availability of custom work, adds Kevin Dhuyvetter, professor and Extension farm management specialist at Kansas State University.

"Making sure you have enough machine capacity to get a crop planted, sprayed and harvested on time is critical given the current value of crops," Dhuyvetter adds. "Having some excess capacity is not necessarily bad if it helps ensure production does not suffer."

Optimal planting and harvesting times vary, so you might need extra or bigger machines in the spring or fall. In other cases, hiring custom work might be more financially sound.

A farmer’s crop mix affects machinery needs, too. Illinois data shows rotations with more corn and less soybeans require more power. From 1995 to 2009, farms with more than 65% of acres in corn had higher power costs per acre than farms with more soybean acres. That cost is driven by the higher cost of harvesting corn, Paulson says.

Other considerations shouldn’t be discounted, including farm growth goals and the need to integrate new technology. By contrast, machinery investments ramped up for a tax write-off might make sense in the short-run but be harder to justify long-term.

Whether depreciation adds significantly to machinery costs depends on whom you ask. Illinois data show a 9% annual increase in depreciation between 1995 and 2011, Paulson says.

"Depreciation and fuel costs have been the two categories with power costs where we’ve seen the largest increase over this time period," he says. Fuel costs have risen 7.4% annually for that period, or 211% overall.

At the end of the day, the defining calculation as to whether acres are overpowered should be made by weighing the cash value of machinery against the cost of upkeep and getting the job done efficiently, Paulson notes.

For more information about machinery trends and sizing equipment for your farm, view a copy of Nick Paulson and Gary Schnitkey's presentation: Equipment Strategies for Improving Soybean Profitability

You can e-mail Nate Birt at nbirt@farmjournal.com.

Machinery Value Trends

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FEATURED IN: Farm Journal - Late Spring 2013

 
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