Farm Horizons, May 2011
Do you know your machinery costs?
This time of the year, our focus tends to shift to getting ready for the upcoming season of planting, nurturing, and harvesting a crop, or several crops.
We know what our seed, chemical, and fertilizer costs will be per acre, but do you know what your machinery cost is on a per-acre basis?
The farms that are enrolled in the Farm Business Management Program do because we calculate it for them each year. But do you?
You can do this in a relatively easy way by going to the University of Minnesota website, http://faculty.apec.umn.edu/wlazarus/documents/machdata.pdf, and get the custom rates for Minnesota. Then go through the list, pick out each field operation, add them all up, and you have a machine cost per acre. Iowa State also publishes a custom rate survey that is updated each year in March.
So, is this my machine cost? Well, no, these are survey numbers and averages across the state. When FBM calculates machine cost, we use fuel and oil cost, repair cost, machine leases, custom hire expense, interest on intermediate debt, and depreciation. So if you have a lot of repairs in a year this will drive your machine cost higher.
Another option is to calculate your own machine cost using the formulas at the beginning of the U of M publication to calculate overhead costs, fuel, repairs, labor, and depreciation.
So now, you have three different options to use to calculate your machinery costs. You need to know this number when you prepare your crop budgets and determine what rent you can afford to pay.
It isn’t just your cash costs that you need to cover with that crop it is also your overhead costs and one of the big overhead costs, is machinery. That tractor or combine has a cost for every day it is standing in your shed, whether you are using it or not.
If you are not using it, how much money is invested in that piece of machinery that could be invested elsewhere and paying you dividends? Is your $200,000 combine returning you a 4 or 5 percent return like you could get in a money market account?
Also, if you compare your machinery costs with other states, we will tend to be higher. Why, you ask? Because of the geography, we have a limited amount of time to get a crop planted and harvested, especially if you have any livestock. So we tend to be oversized on machinery. What we feel comfortable with to farm 500 acres would be considered adequate to farm 700 to 800 acres farther south.
Is there a right number for machine cost? It depends. Do you have livestock? How many acres do you need to plant in a day to get the crop planted in a timely manner? How much risk do you want to take?
When I do cash flow projections, I like to see machine costs in the $100 per acre range. However, when I added up the rates using the Iowa table, I ended up with a machine cost of $115.
So the moral of the story is that you need to calculate your own cost and then decide if it is affordable, and if not, what can you change?
Have a safe and profitable year.