Do you operate your farm like a manufacturing company? As producers, we manufacture grain, so techniques and strategies used by manufacturers might shed light on ways to improve our costs and profitability. A good strategic plan is a start; the challenge comes in determining how to properly size equipment and maximize its efficiency.
For the purpose of this discussion, efficiency is defined as the ability to maximize productivity while minimizing cost. Many in agriculture assume efficiency means acres per hour. We generally have productivity figured out, and we are capable of getting a lot done in a short timeframe. With tighter margins, though, we need to address cost efficiency because it can be improved tremendously.
Know Thy Numbers. First, make sure you have basic numbers available. Add up the total value of your machinery and equipment, taking care to ensure your numbers accurately represent each machine. Ask your local equipment dealer to review the market value of each machine regularly.
To create the best information about equipment, analyze each pass as its own cost center. For example, if you want to measure your planter pass, calculate an individual market value for both the tractor and the planter, as depicted in the example cost-analysis table on this page. Next, determine the percentage of use by the machine. Break out uses by job. In the chart shown at right, let’s assume the tractor is used only for a grain cart and a planter. If 70% of the hours are used on the grain cart, then the other 30% would be applied to the planter.
Then move to logistics. These expenses include transportation, technical fees, insurance, machine idle time and miscellaneous costs during downtime. The next row on the chart is a look at actual productivity per day as the machine works in the field. It does not include turnaround time, road time, idle time or other types of downtime.
Next is labor, which should include operator time as well as support people who keep the machine moving. Fuel and fuel consumption is another line item that should be examined carefully. Consider all fuel expenses, including those for support vehicles and other transit not included in the "Logistics" row.
The final calculation should cover ownership costs for the machine. We use 25% of total value as a standard figure. For example, if you have $100,000 of equipment investment in the first year, you will have $75,000 in the second. The 25% figure represents expenses including repairs, interest and depreciation. If you have new machinery, depreciation and possibly interest will be higher. With older machinery, while depreciation might be lower, repairs often will be higher. In my next column, we’ll tie these expenses together to understand your true cost per acre by individual pass.