Investing in farm equipment & machinery
Here are a few things to keep in mind when investing in new equipment for your farming operation.
Although they’re often necessary, it’s no secret that new farm equipment and machinery purchases are typically costly – but according to retired economist William Edwards, making smart decisions when it comes to acquisition, trading, and how much capacity to invest in can reduce machinery costs as much as $50 per acre.
In this article, we discuss a breakdown of farm machinery and equipment costs and whether or not those purchases will truly serve you and your operation.
Farm Equipment and Machinery Costs
Farm machinery costs can be divided into two categories: 1. annual ownership costs, which occur regardless of machine use, and 2. operation costs that vary directly with the amount of machine use.
The true value of these costs cannot be determined until the machine is sold or worn out, but can be estimated by making assumptions about machine life, annual use, and fuel and labor prices.
Ownership costs (also known as fixed costs) include depreciation – a cost resulting from wear, obsolescence, and age of a machine that takes into account both economic life and salvage value – as well as interest, taxes, insurance, and housing and maintenance facilities, all of which must be added together.
On the other hand, operating costs (also known as variable costs) comprise of repairs and maintenance, fuel, lubrication, and operator labor.
Because repairs and maintenance costs vary from farm to farm due to different management practices and operator skill, Edwards says the best data for estimating repair costs are records of your own past repair expenses. Average fuel consumption in gallons per hour can be calculated using simple equations, and after that is determined, lubrication costs can usually be easily identified. Surveys indicate that total lubrication costs on most farms average about 15 percent of fuel costs, so once the fuel cost per hour has been estimated, you can multiply it by 0.15 to estimate total lubrication costs. Finally, labor costs can be estimated by multiplying the labor wage rate times 1.1 or 1.2.
Justifying Farm Equipment and Machinery Purchases
When considering investing in farm equipment and machinery, farmers should take several factors into account, including:
- Cost, availability, and reliability of contractors
- Cost and availability of leasing or renting equipment
- Cost of complementary investment to reduce logistic delays such as more on-farm storage, an additional chaser bin and/or increased use of haulage contractors
- Financial cost of delays to harvest or seeding (fire risk, weather damage, yield penalties, and grain quality downgrades)
- Skills you have in maintaining and repairing machinery, or availability of mechanical expertise if required
- Cost of new versus second-hand equipment and expected lifespan of that equipment
- Size of your current and future cropping programs and seasonal conditions
- Opportunity cost of using capital that could be allocated elsewhere
In addition, farmers should ensure they’re matching their equipment to their acres. For example, Edwards says grain farmers should have enough equipment to complete tillage and planting in 20-25 working days under normal conditions, and enough harvesting equipment to finish in 25-30 working days, or “a little less time in the northern Corn Belt.”
To accurately determine the machinery and equipment lineup needed to optimally run your operation, Purdue University Center for Commercial Agriculture economist Michael Langemeier, recommends dividing total crop machinery investment by crop acres or harvested acres – that will determine the machinery investment per acre – but he also points to Edwards’ approach of determining the machinery cost per acre, which is computed by summing depreciation, interest, property taxes, insurance, building expense, leasing, repairs, fuel and lubricants, custom hire, and rental expense, then dividing the resulting figure by crop acres or harvested acres.
When it’s time to invest in new equipment for your farm or ranch, it’s important to conduct a cost-benefit analysis to justify the expense. At AgAmerica, we provide operators a financial solution for equipment purchases, including our unique 10-year line of credit.
If you’d like more information about our loan programs for purchasing equipment or upgrading technology, contact us today at email@example.com or 844.516.8176 to speak with one of our loan specialists.