Guidelines to Dial In Your Equipment Decisions
As you build out your 2022 plans, let’s focus on equipment rates and management.
On Twitter, I see people ask: “What are you charging to haul corn 38 miles?” or “What does a person charge for custom planting in this situation?”
The results are interesting, but they vary. The spreads in cost are eye-openers based on location, size of operation, demand, field size, etc.
I read through the responses and compare it to rates from our clients, universities and, of course, our farm. I consistently note most custom rates are lower than rates we help farmers determine. Here are a few reasons why:
1. Depreciation. Although a 10% straight line depreciation, depreciation termed over multiple years or accelerated depreciation are common in
the tax world, they don’t often match reality. In fact, we have recently seen equipment values appreciate on some units. Are you tracking true depreciation on your equipment?
2. Maintenance and Repairs. Running equipment an extra year or two might reduce capital investment, but one major engine, transmission or large mechanical repair bill can set you back years when you might have been better off trading sooner.
3. Inflation. We live in an uncertain environment right now. Historical information can help us adjust for inflation, but most importantly it needs to be part of the decision-making process.
4. Operation Size and Scale. I am amused when folks compare their rates to other operations. What is the size of the operation? What does average really mean? Is it the same exact piece of equipment run over the same number of acres in the same size field with the same efficiency? Probably not.
5. Time. How many years do you plan to operate a machine? Will it see the same number of acres every year? Are you spreading that cost over time? Costs need to be amortized so you don’t over or under inflate their true cost, and more importantly, so those costs don’t negatively impact marketing decisions.
You should truly understand your equipment costs. This is not what you write a check for on principal and interest payment, not the trade cost and not the maintenance, fuel, repair and labor bills. Your farm’s equipment rates need to be a combination of all these factors and maybe a few others. This number should be listed as a true cost per acre, and even a cost per bushel.
As you look at next year’s decisions, dial in your equipment costs. Question and evaluate published rates and ranges, and determine if your costs are adequately compensating for future expenses, upgrades and your 2022 acreage plans. This will set you up for success in 2022 and beyond.
Learn the three factors you should weigh when choosing the best time to update equipment.
Shay Foulk is a farm business consultant with Ag View Solutions, providing profit management and business analysis. He farms and runs a regional seed business with his wife and father-in-law in Illinois.
