Machinery Money

November 17, 2010 07:01 AM
Machinery Money

The close relationship between gross cash farm receipts and machinery purchases suggests
farmers buy big-ticket items when they have cash available and/or to reduce taxes. Planning the most cost-efficient machinery fleet, however, is far more complex than simply looking at the purchase price and potential tax write-offs. Dig through the details to discover the real bottom line.

“The purchase price, including interest, and tax savings versus the resale value defines the cost of ownership,” says Terry Erickson, sales manager for Michigan CAT. “But the total cost includes labor, fuel, replacement parts and downtime. Large operations seek to maximize uptime because they are racing the clock to complete field work in a timely manner.”

What to Own. Ohio farmer Les Imboden is a hard case when it comes to equipment. His general rule is: “If it appreciates, buy it. If it depreciates, rent it, borrow it or hire custom work.” Ask yourself what its value will be in five, 10 or 20 years. Where could you put that money to work harder?

“Your crop won’t know the difference between your owning or leasing a tractor, but your banker sure will,” Imboden says. On a $300,000 tractor, at 5% interest, owning costs $15,000 per year in interest alone. Assuming 160 hours of use, that’s $94 per engine hour. Renting for 160 hours is $7,500 or $47 per hour. “Even at 320 hours of use, the interest versus rental cost is the same. But with leasing, the wear and tear is not your problem—and it’s easier to trade to new technology.”

Benchmark. Compare your numbers with other operations. “Some have annual equipment costs per acre in the mid $20s; others are more than $120 per acre. You really need to be below $65 per acre to be competitive,” Imboden says. How to do that? Own only pieces of primary importance. “I ask myself, ‘If a tornado destroyed everything, what would I absolutely have to replace?’ Planter, sprayer for sure, maybe the combine. Changes in technology have improved sprayer and planter functions, but tractors still only pull stuff. You can rent tractors,” he says.

Take an equipment inventory and log the hours or acres per year each piece is used, he advises. “If you haven’t used it in two years, get rid of it.”

Fine-tuning. ”Translating costs to a common denominator in terms of cost per acre, per ton, per bushel harvested, etc., allows a farm manager to look at alternative procurement methods and then optimize the acquisition decision,” says Dick Wittman, a farmer and financial consultant in Culdesac, Idaho.

“Focus on cost per hour and the cost per year takes care of itself, just as when you manage the pennies, the dollars take care of themselves,” Erickson adds.

Sometimes simply tightening up management can produce large returns. One British wheat operation was able to improve its tons harvested per hour by 30% and reduce its costs by 33% through better driver management, combine settings, maintenance and logistics. A good service program allowed the farm to extend tractor life from 3,400 to 4,300 hours without increased repair costs or downtime.

Measures of Equipment Productivity

> Cost per bushel, ton harvested
> Horsepower per acre
> Machine hours per acre
> Fuel per acre
> Output per hour
> Power unit efficiency*
> Downtime
> Time to pay for itself
*Percent of tractor hours actually “in the swath”

Top Producer, Mid-November 2010

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Spell Check

11/28/2010 07:51 AM

  somebody help me out with Imboden's tractor example: 47 an hour for a $300k tractor seems incredibly cheap to me on 160 hours use. How can a lessor have ownership costs that much cheaper than my own? Sounds more like a shared-use arrangement with a counter-seasonal user. Or maybe its more about superior negotiating skills?


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