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Estimating machinery costs, something every farm manager should know

Ben Eborn for Progressive Forage Published on 30 August 2016

What does it cost to harvest a ton of hay?

I have asked this question to large audiences of hay producers. Several farmers can estimate their harvest costs fairly accurately; some know their costs exactly; others do not know what it costs them.

As you well know, farm machinery and equipment doesn’t come cheap. Larger machines, new technology, higher prices for parts and new machinery are among the many factors that have caused prices to rise in recent years.

To be a good manager, you first have to know what your costs are. Making smart decisions about how to acquire machinery, when to trade, and in some cases, deciding to hire a custom operator can improve the efficiency of your operation.

So to begin, let’s take a look at the two main cost categories: 1) ownership costs, and 2) operating costs and see how they can influence our harvest cost per acre or per ton.

Ownership (fixed) costs

Ownership costs are the fixed costs you must pay (even if you decide to go fishing every day rather than farming). These costs include equipment deprecation, interest, insurance and taxes in some states.

When it comes to fixed costs, there is a level of use where efficiency is achieved. It all has to do with the number of hours you are operating the equipment, or more specifically, the number of acres you cover or tons of hay you harvest. The objective is to spread fixed costs over enough hours, acres, or tons to make them manageable.

Sometimes an easy way to analyze a situation is to look at it from both extremes. Here’s an example: Let’s say you purchase a tractor for $100,000 and its annual depreciation is $10,000. If you bale 100 tons of hay per year, your tractor fixed cost would be $100 per ton. If you bale 1,000 tons of hay per year, your fixed cost would drop to $10 per ton. This is a simple example; the more hay you bale or the more acres you cover, the lower your costs per unit.

Operating (variable) costs

Operating costs are the variable costs associated with farm production. Some of the main production costs are repairs, maintenance, labor, fuel, oil and lube. These costs are only incurred when a production practice is performed. If you decide to go fishing all summer instead of farming, you won’t incur these costs (some years this might sound like a good idea).

It’s also helpful to look at variable costs on a per hour, per acre or per ton basis. So what can we do to lower operating costs? Operating costs are influenced by things like yield per acre, operator skill and efficiency, field size, field conditions, equipment condition and distance between fields.

Here’s an example: If your operating costs (labor, repairs, fuel and oil) for a self-propelled mower are $50 per hour and you can mow 5 acres per hour, your operating costs are $10 per acre. If you were able to double your speed and improve field efficiency to cut 10 acres per hour, then your operating costs would drop to $5 per acre.

Another example: Let’s use the same scenario above with the mower operating costs of $50 per hour. If you can mow 5 acres per hour and your yield is 1 ton per acre, your operating cost is $10 per ton. If your yield was doubled to 2 tons per acre, your operating cost would drop to $5 per ton.

Operating costs can vary quite a bit from one farm to another. It takes good management to lower operating costs and gain efficiency. Some general strategies might include properly maintaining equipment, training equipment operators, purchasing fuel when prices are seasonally lower and improving yields.

Tips to efficiently cut or manage costs

There are many things producers can do to improve production efficiency, but there are no silver bullet solutions when it comes to lowering machinery costs. Here are five tips to consider when estimating machine costs and evaluating alternatives to improve your cost per acre or per ton.

1. Know your costs
Knowing your actual costs is the first step of the decision-making process. Calculating your actual costs for different operations can seem like a lot of work, but with the help of University of Idaho’s machine cost calculator, the process becomes much easier.

Within a few minutes you can know your operating and ownership costs per acre and per hour for almost any field operation (planting, swathing, baling, hauling, etc.). The machine cost calculator can be downloaded at www.uidaho.edu/cals/idaho-agbiz from the Idaho AgBiz website.

2. Compare custom rates
If your machinery costs are greater than custom rates, you may be more profitable selling that piece of equipment and hiring a custom operator. Or you may consider doing some custom work yourself.

This can be a good way to bring in additional income and pass on some of your ownership costs to your customer. The University of Idaho and several other land grant universities publish a custom rates guide where you can compare your costs to typical custom rates.

3. Monitor repair costs
Breakdowns are often more expensive than just the repair bill. Downtime can erode profits in the form of late harvests and lower-quality forage. Repair costs can really add up. We all know from experience, the more equipment is used the more it’s going to break down.

There is a point when it would be better to trade in worn equipment and invest in something new rather than continue to pay for expensive repairs and downtime.

4. Use equipment efficiently

Generally, you need to use tractors 500-plus hours annually and implements 200-plus hours annually in order to be efficient. The more you can harvest or the more acres you can cover, the better. If your equipment efficiency needs some improvement, consider hiring a custom operator rather than owning underused equipment. You may also consider doing some custom work for extra income and pass some of those fixed costs on to your neighbor.

Figures 1 and 2 are just a few examples of how per-hour costs decline and level off with more hours of use.

Cost per hour - 165 hp tractor

5. Consider renting or leasing
Renting equipment for short-term or less common operations can be a way to avoid ownership costs for equipment that is infrequently used. In a rental situation, the ownership costs are passed on to the farmer as a rental rate. The farmer pays a rental fee and operating expenses such as fuel, oil and routine maintenance. All of these costs are tax-deductible.

cost per hour - baler 4x4

Leasing equipment is usually a long-term contract of three to five years. The equipment dealer retains ownership and basically provides financing for equipment services to the farmer.

Many producers have found it profitable to rent or lease equipment rather than purchase it. This can be a complex decision but the University of Illinois has a handy tool to help you evaluate your options. The lease-versus-purchase calculator at http://farmdoc.illinois.edu/fasttools/ can be downloaded at the FAST Tools website.

Conclusion

Machinery and equipment costs can be a huge part of a farm operation’s annual budget. It’s important to know what your ownership and operating costs are on a per-acre and per-ton basis. Once you know what your costs are, you can evaluate alternatives to lower your costs. And who doesn’t want a little extra cash in the pocket?  end mark

Ben Eborn
  • Ben Eborn

  • Extension Ag Economist
  • University of Idaho
  • Email Ben Eborn

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