Budgeting Farm Machinery Costs

Agdex#:	825
Publication Date:	October 2001
Order#:	01-075
Last Reviewed:	October 2001
History:	Revision of Factsheet "Budgeting Farm Machinery Costs", Order No. 94-103
Written by:	J. R. Molenhuis - Business Analysis And Cost of Production Program Lead/OMAF

Table of Contents

1. Introduction
2. Machinery Cost Basics and Calculations
   • Table 1: Trade-In Values as a Percentage of New Cost
   • Table 2: Housing Requirements of Selected Farm Equipment
   • Table 3: Accumulated Repair Costs as a Percent of Purchase Price
   • Table 4: Performance, Horsepower and Fuel Requirements of Selected Farm Equipment
   • Table 5: Example-Annual Fixed and Variable Costs of $220,000 Combine at Three Levels of Use
   • Table 6: Example-Annual Cash Fixed and Variable Costs of $220,000 Combine at Three Levels of Use
   • Table 7: Machinery Cost Calculation Worksheet
3. Alternatives to Purchasing Machinery
4. Decision-Making Aids
5. Machinery Cost Budgeting Terms

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Introduction

Farm machinery costs make up a significant part of the fixed and variable costs of any farm operation. If the capital invested in a machine is to be used efficiently, that machine must be used over enough acres or for enough hours to have costs comparable to or below the same operation being done by a custom operator. This Factsheet provides a framework for calculating the total annual cost of farm machinery so that you can determine whether or not it makes economic sense for you to own a machine. The best source of information to budget farm machinery costs is your records. In the absence of farm records, calculation methods can be used to estimate the costs. The estimates discussed in this Factsheet use an economic engineering approach. The information presented is prepared as a representative guide to estimating machinery costs and is not intended to recognize or predict the costs for any one particular operation. Terms in bold are explained in more detail in the section on Machinery Cost Budgeting Terms.

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Machinery Cost Basics and Calculations

Machinery costs include fixed (ownership) costs and variable (operating) costs. These costs affect the profitability of the business.

Fixed Costs

Fixed costs do not change as the machine sees more use. They include depreciation, interest, insurance and housing. Fixed costs per unit of work done drop as the hours or acres of use per year increase.

Depreciation is a measure of the loss of value of a machine over time. Straight line annual depreciation is calculated by subtracting the trade-in value of the machine from the new cost and dividing the difference by the number of years between purchase and trade-in. The trade-in value or salvage value is the estimated value of the machine at the time of trade-in. Estimated trade-in values as a percent of new price are shown in Table 1. Inflation and equipment supply/demand factors can cause wide variation in these values.

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Interest cost is the interest on the capital you have invested in the machine. The interest rate used should reflect conservative rates of return for money that could be obtained in the current market, e.g. T-Bill rate, GIC rate. If capital is in tight supply, you may want to choose a higher rate that gives you more of a return for the risk you assume in the investment.

Interest costs are calculated by adding the new cost plus the trade-in value of the machine, dividing by two to give an average value over the machine's life, and then multiplying by the chosen interest rate.

Insurance and housing make up a small part of the ownership costs of a machine. Insurance costs can be calculated using the same formula as interest costs given above but substituting the chosen interest rate with the chosen insurance rate. Housing costs are estimated by multiplying the housing rate per square foot by the square feet of housing required. The current market building rental rate per square foot is a good estimate for the housing rate. Housing requirements of selected farm equipment are shown in Table 2. If the insurance and housing rates are not known, 1% of the new cost can be used to estimate annual insurance and housing costs.

Table 1. Trade-in Values as a Percent of Purchase Cost

Source: American Society of Agricultural Engineers Standards, American Society of Agricultural Engineers, 1999

Group 1: Combines, self-propelled forage harvesters.

Group 2: Swathers, mower-conditioners, rotary hay mowers, rotary mower-conditioners.

Group 3: Forage harvesters, balers, bale elevators, tub grinders, augers, grinder-mixers, forage boxes, roller mills.

Group 4: Planters, drills, sprayers.

Group 5: Moldboard plows, chisel plows, cultivators, v-rippers.

Group 6: Disks, harrows, hoes.

Group 7: Manure spreaders, miscellaneous equipment.

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Table 2. Housing Requirements of Selected Farm Equipment

Source: Minnesota Farm Machinery Economic Cost Estimates for 2000, University of Minnesota, Department of Applied Economics, 2000

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Table 3. Accumulated Repair Costs as a Percent of Purchase Price

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Variable Costs

Variable costs increase as the machine sees more use and include repairs, fuel and lubricants, and labour.

Repair costs are relatively low early in the life of a machine, but repair costs rise as a machine ages. Accumulated repair costs as a percent of new cost are shown in Table 3. Storing machines inside helps reduce the rate of weathering and wear, and also slows down the visual signs of aging.

Accumulated Repair Cost Example

Large Round Baler New Cost $20,000

Projected use: 300 acres or 75 hours per year over 10 years

Estimated accumulated repair costs at 750 hours are 25.6% of new cost.

Repair costs will be approximately $5,124 over 10 years (25.6% of $20,000) or about 2.6% of new cost per year.

Used Machinery: When calculating the depreciation on used machinery, use the actual price paid for the machine minus its expected trade-in or salvage value, divided by the expected life of the machine on your farm. Increase repair rates to levels appropriate for the age or number of hours on the machine. Expect to have higher than normal repair expenses in the first year of ownership of a used machine as you bring it back into top operating shape.

Fuel, oil and lubrication costs vary with the annual use of the machine and its maintenance schedule. Lubrication costs add approximately 15% to fuel costs. The best source of information for fuel use is past records. If these records are unavailable, calculate annual fuel consumption using the following method:

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Average Gasoline Consumption (litres/hour)

= (0.229) x maximum PTO horsepower per hour

Diesel units will use approximately 73% less fuel than gasoline units.

= (0.229) x maximum PTO horsepower/hr. x (0.73)

or

= (0.167) x maximum PTO horsepower

The maximum PTO horsepower per hour can be obtained from the Nebraska Tractor Test Data published by the Nebraska Tractor Test Laboratory, University of Nebraska. If the maximum PTO horsepower for a particular tractor is not known, the advertised PTO horsepower per hour or the Nebraska Tractor Test Data for a tractor with similar displacement can be used. The performance, fuel and horsepower requirements of selected farm equipment are shown in Table 4.

Fuel and lubrication costs

litres of fuel used/hr. x hours of use/yr. x fuel cost/L x 1.15

This table does not account for the variation in rates of work or horsepower requirements caused by differences in soil type, topography, field shape, and drainage or equipment operators.

Table 4. Performance, Horsepower and Fuel Requirements of Selected Farm Equipment