Calculate operating costs before the next equipment purchase

There is one fundamental rule that must be followed to justify the ownership of any machine: use it.

That advice comes from a factsheet from OMAFA, the Ontario Ministry of Agriculture, Food and Agribusiness – prepared by John Molenhuis, a business analysis and cost of production specialist with the ministry.

Upgrade: need or want?

Depreciation costs, the cost of money and the cost of insurance stay roughly the same whether you use the machine a little or a lot.

The numbers in the factsheet are continuously being updated, but the advice and analysis remain static. Depreciation costs, the cost of money and the cost of insurance stay roughly the same whether you use the machine a little or a lot. Therefore, the cost per hour or per acre is much higher for a machine that sees limited use, and you would probably be better off renting a machine for short periods or hiring someone to do the work.

“You always wish more producers would crunch numbers,” Molenhuis says. “They should calculate whether they can justify the purchase rather than just calculating whether they can afford it.” He points out that buying bigger equipment than you need may be a reasonable strategy to reduce weather risk for time-sensitive operations, but it comes with a price tag. That price tag has inflated significantly in recent years, too.

“Machinery costs now are around 49 to 50 per cent up since 2017. Things have changed on the cost front for sure. The concept doesn’t change – you have to be able to justify the cost through using the machine.”

While high commodity prices played a significant role in driving machinery costs up, lower commodity prices have more recently meant “the pencil has to be that much sharper” in determining if machinery investments make sense.

Repairs and depreciation

Considering depreciation and repair costs over time is also important, both before and after purchasing machinery.

The optimal life span for any machine is the time it takes to depreciate to one-third of its original value. Molenhuis says this is consistent across all machines. What changes between machines is the number of service years. Based on rental and custom rate guide data from Saskatchewan, Molenhuis’s fact sheet states that “Budgeting farm machinery costs” provides benchmarks for optimal life (in years), annual depreciation rate, and annual repair rate for a range of machine types.

“We’re using averages over time. The concept still holds true of requiring fewer repairs when something is newer. Repairs go up as machines age. In estimating annual costs, we used average repair rates over the optimal life timeframe. It’s our attempt to come up with a reasonable annual estimate,” Molenhuis says.

There are also formulas for estimating fuel and lubrication costs as well as storage and insurance.

Detailed records pay off

Though Molenhuis says his fact sheet benchmarks are valuable, the best information for calculating operating costs is often an individual farmer’s own records. Rod Edgar of R2D2 Farm Ltd. at Wolseley, Saskatchewan, agrees and is especially diligent with his costing information, keeping track of repair costs for each piece of equipment.

A maintenance record accompanies a piece of equipment when it’s sold, and Edgar believes that increases the salvage value.

When equipment is sold, Edgar updates the salvage value, which adjusts the overall cost per acre. Over time, he has become accurate with his estimates.

As of 2017, Edgar says his combine had a fixed cost of $10 an acre with a straight-cut header and $8.50 an acre with a pick-up header. That included the cost of money, but not fuel or labour, which are allocated to overhead costs. In 2025, however, those numbers sit closer to $13.50 and $11.50 per acre, respectively.

“There’s sticker shock with the rising price of new equipment or even good used equipment, but the cost per acre can actually stay about the same after you do an equipment upgrade,” Edgar says, reiterating the price of “just about everything” has risen in recent years.

He admits his strength is farm management rather than mechanics, so he runs a relatively new line of equipment. Running older equipment may or may not reduce fixed costs. Depreciation is reduced, but increased repair bills may offset this.

You can’t manage what you don’t measure, and farm equipment costs are a prime example where measurement is a valuable tool.

From an AgriSuccess article by Kevin Hursh.

Are you managing cash flow effectively?

Learn how cash flow planning can keep you on the right financial track.

Get our guide