Keep Costs Down by Getting the Most Out of Your Iron
With farm incomes slipping off multiyear highs this year -- something that's forecast to continue for a while -- a lot of farmers are looking at ways to maintain their bottom line.
If you're taking the tact of cutting costs to get that done, cutting machinery costs is one of the best ways to tighten your nonland input cost belt, one expert says. But determining whether you can trim your farm's overall iron budget -- and by how much -- depends on a couple of key benchmarks, says Michael Langemeier with Purdue University Extension.
"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," he says.
It's widely accepted that as you scale up in size, your machinery investment per acre goes down. However, it isn't always easy to nail down whether your current iron investment is in line with what you should be paying.
"It is important for farms to compare machinery investment per acre with similarly sized farms and to examine the trend in this benchmark to evaluate machinery use efficiency. A farm with a relatively high machinery investment per acre needs to determine whether this high value is a problem. If the farm faces serious labor or timeliness constraints, this benchmark may be relatively high. However, if this benchmark is high due to the purchase of assets used to reduce income taxes, the manager needs to think about whether this is a profitable long-term strategy," Langemeier says. "Machinery cost per acre is computed by summing depreciation, interest, property taxes, insurance, housing, leasing, repairs, fuel and lubricants, and custom hire and rental expense, and dividing the resulting figure by crop acres or harvested acres. Again, in regions where double-cropping predominates, using harvested acres is preferable."
And don't just compare with other farms in your area; look at it for your own place over a little longer time period, Langemeier advises.
"It is just as important to track the trend in the machinery benchmarks over time on the same farm," he says. "Increases in machinery investment and cost are often related to decreases in financial efficiency such as lower asset turnover ratios and higher depreciation expense ratios."
Here's a rundown of machinery investment and cost estimates for an average Midwest row-crop farm, according to Langemeier. (Chart: Purdue University Extension)
So, what goes into these cost estimates? Answer that question, and you'll also get a glimpse into some of the factors that can help you bring down those costs most easily, Langemeier says.
"A second factor impacting machinery investment and cost relates to the alternatives available for acquiring machinery. Alternatives include ownership, rental, leasing, and custom hire. To increase control over use and timeliness of machine use, most farm managers prefer to own machinery. If ownership is the preferred option, a farm needs to carefully monitor machinery investment and cost," Langemeier says. "Factors that can lead to reductions in investment and cost include the following: using smaller machinery, increasing annual machine use, holding onto machinery longer before trading, purchasing used machinery, using alternatives to ownership such as custom hire, and farming more intensely. Of course, many of these factors may decrease timeliness, which could be particularly detrimental during planning and harvesting seasons. Thus, as with most machinery issues, a balance between controlling machinery investment and cost, and timeliness needs to be reached."