Calculate operating costs before that next equipment purchase
There is one fundamental rule that must be followed to justify the ownership of any machine. USE IT.
That advice comes in a factsheet from OMAFRA, the Ontario Ministry of Agriculture Food and Rural Affairs – a factsheet prepared by John Molenhuis, a business analyst and cost of production specialist with the ministry.
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 in the process of being updated, but the advice and analysis remain valid. 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 on a machine that sees limited use, and you would probably be better off renting a machine for short periods of time 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. Another question worth asking is: should you lease or buy the equipment you need?
One of the tables in the factsheet is Trade-In Values as a Percentage of New Cost. A 10-year-old combine is worth only 25% of new value according to the chart, whereas a 10-year-old tractor is worth 32 to 37%, depending on its size. This is one of the charts Molenhuis is working to update.
Another is Accumulated Repair Costs as a Percentage of Purchase Price. This chart shows that on a two-wheel drive tractor, you could expect to pay 6.2% of purchase price in repairs by the time the tractor has 3,000 hours. By 6,000 hours, the accumulated repair bill is estimated at 25% and by 9,000 hours, the repair bill is more than 56% of the purchase price.
There are also formulas for estimating fuel and lubrication costs as well as storage and insurance.
OMAFRA has an online equipment cost calculator, as does Alberta Agriculture, Food and Rural Development. Ted Nibourg, a business management specialist with Alberta Agriculture, says the three Prairie provinces are exploring ways to work together to keep up with changes in equipment costing.
“For many producers, number-crunching comes down to sitting across from their sales rep and negotiating the purchase price,” Nibourg says. “They don’t work out what a piece of equipment costs per acre or per hour of use, but this is valuable information to have from a management perspective.”
The machinery cost calculators provided by Ontario and Alberta are a good starting point, but they contain many generalized costing assumptions that may not be accurate for your farm.
The best numbers are your own. Rod Edgar of R2D2 Farm Ltd. at Wolseley, Sask., 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 his salvage value number, which adjusts the overall cost per acre. Over time, he has become accurate with his estimates.
“My current combine has a fixed cost of $10 an acre with the straight cut header and $8.50 an acre if I’m using the pick-up header,” Edgar says. This includes the cost of money, but not fuel or labour, which he allocates into overhead costs.
“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.
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 this may be offset by increased repair bills.
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
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