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Machinery costs up 15% -- economist

The bullish factors have outweighed the bearish ones in the farm machinery marketplace in the last 2 years, and that's led to a double-digit rise in machinery costs since 2010, new research shows.

Prices have increased, but interest rates have sunk. Fuel prices have gone up, and so too have labor costs. The latter pair of factors has had the greatest influence on machinery costs that have gone up by 15% since 2010, says University of Illinois Extension ag economist Gary Schnitkey.

Here's how Schnitkey breaks down the major variables:

  • Machinery prices have increased: Prices of new machinery have increased for most machines between 2010 and 2012. For example, the list price of a 215 horsepower tractor in 2012 is $215,000. A comparable sized tractor in 2010 has a list price of $181,500. Between 2010 and 2012, the price of this tractor has increased by 18%. The impact of price increases is to increase machinery costs.

  • Interest rates have declined: When calculating 2010 costs, a 6% interest rate is used. A 5% interest rate is used in calculating 2012 costs. The impact of an interest rate decline is to reduce machinery costs.

  • Fuel prices have increased: A $2.80 per gallon diesel fuel price is used in calculating costs in 2010. A $3.50 per gallon price is used for calculating 2012 costs. The impact of a fuel price increase is to increase in machinery costs.

  • Labor prices have increased: A labor charge of $16 per hour is used in 2010 and a $17 per hour charge is used in 2012. The impact of the increase in labor charge was to increase machinery costs.Combining costs are estimated at $35.80 in 2010. The 2012 cost is $33.70 per acre. Combining costs have declined because acres covered by a combine are increased. In 2010, costs are estimated using 1,400 acres were combined. In 2012, costs are estimated given that 1,900 acres were combined. Use has a large impact on all costs.

Looking ahead, there's even more potential for machinery cost growth, Schnitkey says. Interest rates basically have nowhere to go but up. And, right now, combine costs are lower than the rest of the sector. Those, too, could rise soon.

"In our estimates, combine costs have declined between 2010 and 2012 because acres covered with the combine are assumed to increase in 2012," Schnitkey says. "Estimated cost increases would have been larger had not interest rates declined. Machinery costs will increase in the future if interest costs begin to rise."

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