Machinery Chatter
Russ Quinn DTN Staff Reporter

Wednesday 06/25/14

Purdue University Article Examines Machinery Investment, Costs

When my wife and I got married, Tracie was introduced to the inter-workings of running a farm. She grew up in a small Nebraska town but her parents did not farm, although her grandparents did nearby.

That first spring of writing out seed, fertilizer, ag chemical, feed, etc. bills led her to tell me she couldn't believe how much money we were dealing with. I told her compared to many other farmers we are fairly small. Can you imagine the amount of bills if we were farming thousands of acres compared to hundreds, I remember telling her.

I am just glad she didn't run out of the house and back to town at that point.

Farmers have a lot of money invested in all aspects of their farming operations, but especially in machinery. Farmers need to watch closely what they spend on farm machinery as farm size as well as machinery size increases.

This was the conclusion of a recent article published in Purdue University's Purdue Agricultural Economics Report for June.

Written by Michael Langemeier, professor and assistant director of the Center for Commercial Agriculture, the article examines machinery investment and costs using an Indiana case-study farm. The article then breaks out the estimated cost of machinery investment for the case farm and discusses factors affecting machinery investment and cost.

In the first section, the paper looks at ownership and operating costs for a 260 hp tractor owned by a case farm.

This farm had no livestock and 3,000 acres of crop land. By calculating various factors such as remaining value, ownership and operation costs, the total machinery costs for this one tractor were $33,147. Divided over 3,000 acres, the machinery cost per acre was $11.05/ac for this tractor.

The next section of the article details machinery investment per acre and machinery cost per acre for the entire case farm, two commonly used benchmarks to evaluate the efficient use of machinery. Machinery investment per acre is computed by dividing total machinery investments (i.e. investment in tractors, combines and other machinery) by crop acres or harvested acres.

The machinery investment per acre for this farm came to $304.50. This case farm had 3,000 acres with 1,500 acre of corn and the same amount to soybeans. The farm does not custom hire any equipment needs.

The author then calculated the machinery costs per acre, which is figured by summing depreciation, interest, property taxes, insurance, housing, leasing expense, repairs, fuel and lubricant, custom hire and rental expense and then dividing thus figure by the farm's crop acres.

Machinery costs per acre for the farm were $99.93 per acre. The three largest costs were depreciation ($42.70 per acre), interest ($21.92 per acre) and fuel and lubricants ($18.09 per acre).

Langemeir compared these numbers to studies of other machinery benchmark studies done in Kansas and Illinois.

In a 2013 Kansas Farm Management Association study, the average crop machinery investment per harvested acre was $259 and average cost per harvested acre of $88. In an Illinois study, a farm with 1,500 acres would have a machinery investment per acre of $425 while a farm with 3,000 acres would have a machinery investment per acre of $375 per acre.

Also, Langemeier did his own study that found farms with above average crop machinery investment and cost per acre had average values of $429 and $124 per acre. The case farm had machinery investment costs below these levels.

There are three main factors which affect machinery investment and cost, according to the article.

The first would be machinery selection. Purchasing larger machinery allows a farmer to get work completed in a more timely fashion but it also can lead to higher machinery investment and costs unless the farm can expand by leasing or buying more acres.

The second factor relates to alternatives available to farmers for acquiring machinery. These alternatives include ownership, rental, leasing and custom hire. Farmers need to balance between watching machinery investment and costs and having the control over the machine, the article states.

The final factor affecting machinery investment and cost would be replacement decisions. Most farms follow one or maybe even a mixture of different strategies, which include keep and repair, trade often, trade when income is high or invest each year.

So what do all these machinery investment and cost numbers and the factors affecting them tell us?

The author concludes by saying farm managers should utilize machinery investment per acre and costs per acre benchmarks every year. Farmers should then monitor them over time to watch their machinery costs closely.

"Understanding your machinery economics has great value in potentially lowering costs, increasing output and throughput, and in making decisions such as whether to own, lease or custom hire machinery," the article concludes.

To read the entire Purdue University Agricultural Economics report, go to http://www.agecon.purdue.edu/…. The machinery report begins on page 5 and concludes on page 9.

Posted at 10:22AM CDT 06/25/14 by Russ Quinn
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