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Business Matters: Review Each Pass One More Time

07:32AM Oct 01, 2014

Equipment cost is the second-largest line item expense for most grain producers next to land. In fact, for producers with lower land values and productivity, equipment can be the No. 1 expense. Yet equipment expenses tend to be among the least understood. 

In my previous column, we discussed the components of machinery costs such as basic equipment value, logistics, labor, fuel, depreciation, interest and repairs. All are factors that must be calculated to accurately understand cost. Break out expenses by each operation. Remember totals for each expense are averages, and averages and totals aren’t good enough in a tight margin environment. 

As you break expenses down for each pass, you can develop a clearer understanding of efficiency within each operation. Knowing the total amount of money you spent on fuel last year isn’t nearly as valuable as understanding the total fuel consumed during your planter pass. Knowing the fuel consumption for every pass might instantly reveal opportunities for savings or changes that could improve overall costs. Understanding depreciation costs for specific equipment used in an operation can help you determine whether a trade is feasible. You might assume that because a specific machine has a significant level of tax depreciation during a given year, it might not make sense to trade. Yet market value depreciation may not be as much as you think. If a machine has covered significant acreage and if you understand its individual efficiency, there could be a valid economic reason to trade. The key is to understand the differences in alternative expenses such as repairs and downtime, which can affect the overall efficiency of an operation. 

Tally Your Acres. The top variable that determines your cost per acre is the number of acres you plan to cover for a specific operation.  

This is where the rubber meets the road. How many acres can you feasibly cover in a day? How many acres can you cover annually? Dividing expenses over acres of coverage by each pass will provide a clear picture of cost-per-acre value. 

The chart on this page should serve as a template for the components discussed in this series. Our equipment has an immense number of financial moving parts. There are complexities to think through, but try to put basic numbers together into a condensed and concise format. Even if your numbers aren’t perfect, you have to start somewhere. As you begin to analyze equipment from one operation to the next, your numbers will become more accurate. It’s impossible to run a marathon without training, and it’s impossible to know your costs without tracking them. 

The chart above represents how a producer might break down costs for an operation of 2,950 acres.