If you have lower-than-average machinery costs, it's likely you have higher-than-average profits … and vice-versa.
That's what Gary Schnitkey, University of Illinois ag economist, found in a study of farmers enrolled in the Illinois Farm Business Farm Management Association.
The study involved nearly 1,700 cash grain operations that do little or no custom work. Farm acreage categories were: less than 500; 501-750; 751-1,000; 1,001-1,500; 1,501-2,000 and over 2,000.
On average, machinery costs represented 16% of total costs on grain farms, a significant proportion of total expenses, Schnitkey says.
“There's considerable variability in machinery costs across farms, with the more profitable farms tending to have lower per-acre machinery costs,” Schnitkey points out. “Although having high or low machinery values (inventory) does not necessarily indicate that a farm has a problem with machinery costs (total machinery expenses), having either high or very low machinery values suggests a farmer should evaluate his or her machinery practices.”
The study allows a farmer, via the Internet, to compare machinery values and costs to Illinois benchmarks to determine whether either are high or low. For machinery values (current machinery worth), check: www.farmdoc.uiuc.edu/manage/newsletters/html/111201.html. For costs (depreciation, repairs, hiring, leasing, fuel and oil), access: www.farmdoc.uiuc.edu/manage/newsletters/html/041801.html.
Although large operations have higher machinery values, the per-acre value tends to decline as farm size increases. For example, the median machinery value on an 875-acre farm was $218,750 or $250 per tillable acre. At 1,350 acres, the median machinery value totaled about $318,600, but dropped to $236/acre. That's $14/acre less.
“Having high machinery values and high costs that often go with them can result from too much equipment, too large of equipment or trading equipment too often,” Schnitkey says. “On the other hand, having low values may mean older equipment and high repair costs.”
University of Nebraska's findings were similar to Illinois', says Terry Prokop, with Nebraska's farm records program. “The most efficient operators are able to control all costs without harming revenue. Limiting capital investment and, therefore, depreciation, is one place where efficiency shows up.”
For example, Prokop says, in 2001 enterprise analysis under irrigated corn (share rent), the low-profit third of operations had a per-acre depreciation cost of $39.58/acre, while the high-profit third had only $20.22/acre.
“The numbers are not always that far apart, but the high-profit operators generally keep depreciation numbers low,” Prokop points out.
“The extremely profitable operators tend to pay cash for their equipment, which lowers their cost per acre,” says Rick Brantner, an ag lender with Amcore Bank, Dixon, IL. “But they don't necessarily buy brand-new equipment. They watch ads closely and seek high-quality used equipment, such as a mint-condition two- or three-year-old combine.
“They are willing to travel quite a distance, if necessary, when they find what they want in big-ticket items like a tractor, planter, combine or self-propelled sprayer,” he adds.
Lower machinery costs can come in several forms, points out Kent Meister, fieldman for the Illinois Farm Business Farm Management Association.
“For example, no-till farmers need less equipment,” he says. “Yet some conventional-till farms also have low machinery costs. What is consistent is the operator's intent to keep costs low.
“The key is to be timely in all operations and accurate in planting without being excessive in equipment. It's crucial that a farmer work at this balance,” says Meister.
Lower machinery costs don't automatically lead to higher profits, maintains Rob Zemenchik, Case IH/New Holland agronomy research manager. “Lower cost per unit of production is what counts,” he says.
For example, a yield monitor may add to total expenses, but it can reduce the cost per unit of production, Zemenchik notes. It can allow the user to identify problem areas and to allocate crop inputs more appropriately.
Timely planting and harvesting obviously increase yields. “The Iowa Soybean Association published a study that showed the single greatest correlate to profitability was, by far, high yield,” he says. “That was followed by cutting gross costs — at a distant second. In today's economy, the farmer with the most bushels wins.”
Wise machinery selection can lead to higher yield, greater efficiency and more profit, adds Norm Larson, an agronomy manager also with Case IH/New Holland. A new Case IH 1200 Series planter, for example, allows planting various seed sizes with no setting changes while achieving uniform spacing. Using an updated planter such as that for soybeans gives better population and depth control and better spacing than a drill.
“Seed costs are much higher than they were a few years ago,” Larson says. “A farmer can offset much of that increase with precision planting equipment that uses seed more efficiently.”
Custom Work Doesn't Cut Costs, Says Ag Economist
In an effort to reduce per-acre machinery costs, some farmers do custom work. But this could be deceptive, says Gary Schnitkey, University of Illinois ag economist.
“Average custom rates in Illinois for 2001, at about $70/acre for tillage, planting and harvesting, were higher than average machinery ownership costs of $58/acre,” Schnitkey notes. “However, that custom rate did not include a labor charge (estimated at $10/acre) or an interest charge on the value of machinery (estimated at $18/acre).” Adding that $28 in labor and interest to the $58/acre machinery cost boosts total per-acre expense to $86/acre, well above the average custom rate.”