Calculating your equipment cost and figuring it into your cost of production can be a challenging task. One way I see many producers evaluate their equipment cost is to use the local universities “custom rate survey” report. With this information the producer will assign a custom rate to each pass that they complete for the growing season and harvest. By totaling up these values the producer can gain some idea of equipment cost which can be translated into their cost of production. Generally this method will cover the equipment expenses for your operation and is a quick and easy way to calculate cost.
One potential problem with this method is you are relying on other people’s numbers to produce your individual cost structure. There are several variables that can be different from one operation to another such as fuel, labor, repairs, depreciation, and interest rate. With this in mind we will look at one method to determine your equipment cost which is consistent and effective in determining your individual cost.
The first piece of information to collect is total equipment value. The second piece of information is to calculate your total acres of operation which should include all of the acres you farm plus any custom work. The final component you will need is to include a standard annual ownership cost. The generally accepted standard is to use 25% of your total machine value. This 25% is comprised of 10% interest or opportunity cost, 10% depreciation, and 5% repairs. These numbers may vary from one operation to another. If you have older machinery your repairs may be higher but depreciation would be lower. On the other hand, new machinery lowers repairs but increases depreciation and interest.
Here is an example calculator to help you understand how to set this up within your own operation.
| Equipment Cost Calculator | ||
| Total acres Farmed | 3,000 | |
| Total Equipment Value | $800,000 | |
| Annual ownership % | 25% | |
| Annual Cost / Acre | $66.67 | |
Assuming this 3000 acre producers machinery value is $800,000 then his/her annual cost per acre would be $66.67. Using this type of calculation year in and year out gives you a consistent tool to use in order to analyze how a purchase decision may impact your operation on a per acre basis from year to year.
Once you have this fundamental process in place you have the primary cost of your equipment calculated. From here, all you need to do is calculate your fuel and labor cost for each pass you complete on your operation and you will have an accurate machinery cost per acre.
