BUDGETING FARM MACHINERY COSTS (Revision of Factsheet Budgeting Farm Machinery Costs, Order No ) J. R. Molenhuis

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1 ORDER NO OCTOBER 2001 AGDEX 825 BUDGETING FARM MACHINERY COSTS (Revision of Factsheet Budgeting Farm Machinery Costs, Order No ) J. R. Molenhuis 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. 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. 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. 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.

2 TABLE 1. Trade-In Values as a Percentage of New Cost Tractors End of Group Group Group Group Group Group Group Year <80 hp hp 150+ hp 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. TABLE 2. Housing Requirements of Selected Farm Equipment Sq. ft required Sq. ft required 4 l8 in. Furrow Plow ft No Till Drill in. Furrow Plow ft Sprayer l8 in. Furrow Plow ft Sprayer ft Field Cultivator ft Mower Conditioner ft Field Cultivator ft Rotary Mower/Conditioner ft Field Cultivator 350 Square Baler ft Chisel Plow 200 Round Baler 1000 lbs ft Chisel Plow 225 Round Baler 1500 lbs ft Tandem Disk 160 Large Size Square Baler ft Tandem Disk 210 Round Baler 1000 lb/wrapper 100 4R 36 in. Row Crop Planter Row Forage Harvester 140 6R 30 in. Row Crop Planter 170 Large Forage Blower 30 12R 30 in. Row Crop Planter 300 Combine 190 hp Corn Hd 4R 30 in R 36 in. Minimum Till Planter 150 Combine 275 hp Corn Hd 12R 30 in R 30 in. Minimum Till Planter 170 Combine 220 hp Grain Hd 20 ft 478 8R 30 in. Minimum Till 200 Combine 275 hp Grain Hd 30 ft ft Grain Drill 130 Combine 220 hp Soybean Hd 15 ft ft Grain Drill 200 Combine 275 hp Soybean Hd 25 ft ft Presswheel Drill 115 Tractors less than 80 hp ft Presswheel Drill 130 Tractors hp ft No Till Drill 160 Tractors 150+ hp 240 Source: Minnesota Farm Machinery Economic Cost Estimates for 2000, University of Minnesota, Department of Applied Economics, 2000

3 TABLE 3. Accumulated Repair Costs as a Percent of Purchase Price Machine ¼% LIFE Accumulated Hours Costs ½% LIFE Accumulated Hours Costs ¾% LIFE Accumulated Hours Costs FULL LIFE Accumulated Hours Costs 2 Wheel Tractors % % % % 4 WD and MFWD Tractors % % % % Self Propelled Combines % % % % Planters, Drills % % % % Moldboard Plows % % % % Disk, Disk Harrows % % % % Chisel Plows % % % % Cultivators % % % % Mowers % % % % Square Balers, Small % % % % Square Balers, Large % % % % Large Round Balers % % % % SP Forage Harvesters % % % % Rakes % % % % Source: American Society of Agricultural Engineers Standards, American Society of Agricultural Engineers, 1999 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: Average Gasoline Consumption (litres/hour) = (0.229) maximum PTO horsepower per hour Diesel units will use approximately 73% less fuel than gasoline units. Average Diesel Fuel Consumption (litres/hour) = (0.229) maximum PTO horsepower/hr (0.73) or = (0.167) 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 hours of use/yr fuel cost/l 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.

4 TABLE 4. Performance, Horsepower and Fuel Requirements of Selected Farm Equipment HP required Acres/hour Litres/ac Litres/hour 4 l8 in. Furrow Plow in. Furrow Plow 130 MFWD l8 in. Furrow Plow ft Field Cultivator ft Field Cultivator 105 MFWD ft Field Cultivator ft Chisel Plow ft Chisel Plow 130 MFWD ft Tandem Disk ft Tandem Disk 105 MFWD R 36 in. Row Crop Planter R 30 in. Row Crop Planter R 30 in. Row Crop Planter 105 MFWD R 36 in. Minimum Till Planter R 30 in. Minimum Till Planter R 30 in. Minimum Till Planter 105 MFWD ft Grain Drill 130 MFWD ft Grain Drill 160 MFWD ft Presswheel Drill ft Presswheel Drill 130 MFWD ft No Till Drill 130 MFWD ft No Till Drill 160 MFWD ft Sprayer ft Sprayer ft Mower Conditioner ft Rotary Mower/Conditioner Square Baler Round Baler 1000 lbs Round Baler 1500 lbs Large Size Square Baler 130 MFWD Round Baler 1000 lb/wrapper Row Forage Harvester 105 MFWD Large Forage Blower Combine 4R 30 in. Corn Hd Combine 12R 30 in. Corn Hd Combine Grain Head 20 ft Combine Grain Head 30 ft Combine Soybean Head 15 ft Combine Soybean Head 25 ft Source: American Society of Agricultural Engineers Standards, American Society of Agricultural Engineers, 1999 Labour costs are a consideration in any budget, but the value used will depend on the situation. Estimate the labour rate for the owner/operator using the opportunity cost for use of time. A constant rate for hired labour is appropriate. The rate should not be less than the typical labour rate for the area. Add labour costs where you feel it is justified. There is one fundamental rule that must be followed to justify the ownership of any machine: USE IT. Machinery is expensive and ties up large amounts of capital. If a machine is to be cost-effective, it must see enough hours of use annually to have fixed and variable costs below the cost of the same operation being done via alternatives to purchasing. Consider the combine shown in Table 5 at 3 different levels of annual use. This does not account for the issue of when the custom operator can arrive at your farm. For many, the benefits have to be better than breakeven for them to hire a custom operator over ownership due to the control over when the crop is harvested. This same principle applies for any farm operation that requires timely access to machinery. Planting and harvesting are two primary operations that, if delayed, can have a significant affect on yield and quality. Farms harvesting less than 840 acres should consider alternatives to purchasing the new machine.

5 TABLE 5. Example: Annual Fixed and Variable Costs of $220,000 Combine at Three Levels of Use Hours Per Year Acres Per Year Fixed Costs Per Year $24,888 $24,888 $24,888 Variable Costs Per Year $5,067 $11,964 $20,837 Total Annual Costs $29,955 $36,851 $45,725 Annual Cost Per Acre $35.66 $21.94 $18.14 Custom Combine Per Acre 1 $32.25 $32.25 $32.25 The breakeven for purchasing versus hiring a custom operator in this case is around 955 acres 1 Custom Farmwork and Equipment Rental Survey Results, OMAFRA, 2000 TABLE 6. EXAMPLE: Annual Cash Fixed and Variable Costs of $220,000 Combine at Three Levels of Use Hours Per Year Acres Per Year 840 1,680 2,520 Variable Costs Per Year $5,067 $11,964 $20,837 Cash Fixed Costs $33,050 $33,050 $33,050 Total Annual Cash Costs $38,117 $45,014 $53,887 Annual Cash Cost Per Acre $45.38 $26.79 $21.38 Custom Combine Per Acre $32.25 $32.25 $32.25 The breakeven would be around 1290 acres Annual Cash Costs Based on Repayment Cash costs estimate the impact of the purchase and its use on annual cash flow. Tax savings can be considered when applicable. If we take the debt servicing requirements of the combine in Table 5 and add a return on investment for the interest lost on the down payment invested, here is what the annual cash costs of this machine would be: Combine New Cost $220,000 Down Payment 4.5% = $2,025 Finance 7.25%, 7 yrs. = $31,025 Total Annual Cash Fixed Costs = $33,050 The resulting change in breakeven when considering annual cash costs is shown in Table 6. Highly profitable operations would be able to justify covering fewer acres because of the additional tax savings from the capital cost allowance on the combine. CCA expense for this machine at 30% would be $42,075 in the second year of ownership. Tax savings, depending on the marginal tax rate of the individual or corporation that owns the machine, could range from nothing to about $19,500. ALTERNATIVES TO PURCHASING MACHINERY The 3 most common alternatives to purchasing machinery are leasing, equipment rental or hiring custom farmwork. Leasing Farm Equipment An increasingly popular option to consider when acquiring farm machinery is leasing farm equipment. The popularity of leasing is in part due to the increasing cost of machinery and the outlay of large amounts of capital. See OMAFRA Factsheet Leasing Farm Equipment, Order No Custom Farmwork and Machinery Rental Hiring custom farmwork provides an option to farmers to purchase the service instead owning the equipment and doing the work. Custom farmwork operators are well advised to calculate their own machinery costs to ensure they are covering their costs plus a return for their risk and time. A survey of Ontario Custom Farmwork and Equipment Rental Rates is conducted regularly by OMAFRA. The latest Custom Farmwork and Rental Rates Charged in Ontario summary is available from the OMAFRA Business Development Web site at: DECISION-MAKING AIDS Machinery Tools The Machinery Tools worksheet contains a machinery cost calculator, cost charts, factsheets on machinery tax and budgeting, and a comparison worksheet that looks at machinery replacement options including purchase, repair, lease and custom hire. An Excel worksheet, it also has a simple cash basis lease worksheet. Equipment Lease Analyzer It is a decision-making aid to help evaluate the economic differences between purchasing and leasing equipment. The Machinery Tools and Equipment Lease Analyzer spreadsheets can be downloaded from the OMAFRA Business Development Web site at Computer Management Tools, agbusdev.html.

6 MACHINERY COST BUDGETING TERMS Accumulated repair costs total cost of repairs that have been incurred over the life of the machine to date. Capital cost allowance an amount (expressed as a %) allowed to be expensed for tax purposes against the cost of capital assets acquired by a business. Different types of assets attract different percentages. Depreciation, straight line a method in which equal amounts of depreciation expense is budgeted for each time period over the economic life of the asset. Economic engineering approach the American Society of Agricultural Engineers Farm Machinery Management Committee publish standards for Agricultural Machinery Management. Formulas based on representative values of farm machinery operation parameters are developed to assist in estimating the performance of field machinery. Economic Life (useful life) the period of time during which an asset has economic value and is usable. Insurance rate percentage of the value charged by commercial insurance companies to insure the machinery investment. Lease a contract for the use of machinery for an agreed period of time in return of periodic payments. Ownership remains with the lessor. The lessee acquires the right of temporary possession and use. Nebraska Tractor Test Data Tractors are tested at the University of Nebraska Tractor Test Laboratory under similar conditions to provide a means of comparison of performance of different tractor makes and models. Operating costs variable costs, costs that depend directly on the amount of machine use. Opportunity Cost the potential benefit that is lost by choosing one good or service at the expense of giving up another good or service. For example, if a farmer could earn a salary of $ 40,000 by working off the farm, $40,000 would be the opportunity cost of choosing to work on the farm. Ownership costs fixed costs, costs that do not depend on the amount of machine use. Total annual cost the sum of fixed (ownership) and variable (operating) costs. This Factsheet was revised by John Molenhuis, Business Analysis and Cost of Production Program Lead, Brighton, OMAFRA. Agricultural Information Contact Centre ag.info@omafra.gov.on.ca

7 TABLE 7: Machinery Cost Calculation Worksheet MACHINE: NEW PRICE: LIFE (YEARS): TRADE IN VALUE: INTEREST RATE: HOURS PER YEAR: ACRES PER YEAR: FUEL COST PER LITRE: RATE OF WORK (ACRES/HOUR): FUEL USE (LITRES PER HOUR): ANNUAL LOAN PAYMENTS: DOWN PAYMENT: ANNUAL COSTS VARIABLE COSTS PER YEAR FUEL AND LUBRICANTS = LITRES per hour x HOURS per year x FUEL COST per litre x 1.15 = x x x 1.15 = $ + REPAIRS = NEW PRICE x % RATE (BASED ON ACCUMULATED HOURS) = $ x % = $ + LABOUR (OPTIONAL) = WAGE RATE x HOURS per year = $ /hr x hours = $ TOTAL VARIABLE COSTS PER YEAR = $ FIXED COSTS PER YEAR DEPRECIATON = NEW PRICE TRADE-IN VALUE = $ - $ = $ LIFE (YEARS) YEARS + INTEREST = NEW PRICE + TRADE-IN VALUE x INTEREST 2 RATE = ($ + $ x % + $ USE EITHER METHOD 1 OR METHOD 2 to calculate Insurance and Housing. METHOD 1. INSURANCE = NEW PRICE + TRADE-IN VALUE x INSURANCE $ 2 RATE + HOUSING = SQUARE FEET REQUIRED x HOUSING RATE $ METHOD 2. INSURANCE AND HOUSING = NEW PRICE x 1.0 % = $ x 1.0 % =$ TOTAL FIXED COSTS PER YEAR = $ TOTAL ANNUAL COST = FIXED COSTS + VARIABLE COSTS = $ + $ = $ COST PER ACRE = TOTAL ANNUAL COSTS CASH = $ COSTS FOR TERM OF LOAN$ per acre ANNUAL PAYMENTS ACRES ON per LOAN year ACRES= $ ANNUAL CASH COSTS FOR TERM OF LOAN ANNUAL PAYMENTS ON LOAN = $ + DOWN PAYMENT x INTEREST RATE = $ + TOTAL VARIABLE COSTS per year = $ TOTAL (PRE-TAX) CASH COSTS per year = $ CASH COSTS = TOTAL CASH COSTS PER YEAR = $ $ per acre PER ACRE ACRES per year ACRES

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9 Pennsylvania Agricultural Statistics Service North Cameron Street, Room G-19 Fax: Harrisburg, PA Marc Tosiano, State Statistician A field office of USDA s National Agricultural Statistics Service in cooperation with the Pennsylvania Department of Agriculture Pennsylvania's 2003 Machinery Custom Rates

10 Pennsylvania Machinery Custom Rates 2003 By Scott W. Shimmin Agricultural Statistician The custom rates shown are averages from voluntary reports by custom operators and farmers throughout Pennsylvania. Most of the rates are stated per acre, cwt., ton, bale, or bushel rather than per hour to reduce the variation due to machinery size. Individual rates vary due to differences in working conditions, services performed, or even the operator's eagerness to do custom work. Therefore, the average rates shown should not be considered absolute indications of fair charges. Acreage rates are shown separately for two regions of the state, labeled "Mountain" and "Valley". The differences in rates between regions reflect differences in terrain, soils and alternative opportunities for the labor and equipment used. Figures labeled "State" represent the straight average of all reports used regardless of geographic location. Of the 63 rates reported with year-to-year comparisons, 41 increased, 16 decreased, and 6 are the same as last year. Thirteen new items were added to the survey this year. Because of the potential variation in size and overall productivity of equipment, a range of reported rates for each job has been added. The range represents the middle 80 percent of all reported rates for each job, thus the lowest 10 percent and the highest 10 percent of all reported values were excluded Pennsylvania s Machinery Custom Rates - Page 2 PA Ag Statistics Service, NASS, USDA

11 Job Custom Rates: Selected Farming Operations, Pennsylvania, 2003 Basis of Charge Mountain Section (Dollars) Valley Section (Dollars) State (Dollars) Range (Dollars) Harvesting Corn Picking... Acre Corn Combining... Acre Corn Drying (23 Percent)... Bu Combining Small Grains... Acre Combining Soybeans... Acre Hay Making: Mowing... Acre Mowing & Conditioning... Acre Raking... Acre Small Square Baling... Bale Cut, Rake, Bale & Store... Bale Large Round Baling... Bale Size... Lbs. 1,020 lbs. 850 lbs. 930 lbs ,350 lbs. Large Square Baling... Bale Size... Lbs. 960 lbs. 920 lbs. 930 lbs ,400 lbs. Wrapping Bales... Bale Silage Making: Pull-Type Chopper & Tractor... Hour Self-Propelled Chopper... Hour Less than 350 HP... Hour Greater than 350 HP... Hour Blower... Hour Man, 2 Wagons, 1 Tractor... Hour Men, 2 Wagons, 2 Tractors... Hour Man, 1 Truck... Hour Field Chop, Haul & Fill Silo... Ton Bagging Silage... Foot Average Diameter... Feet feet Plowing & Cultivating Plowing, Moldboard Plow: Stubble... Acre Sod... Acre Plowing, Deep (10 Inches or More). Acre Plowing, Chisel... Acre Plowing, Disk... Acre Disking, Tandem... Acre With Harrow or Cultipacker... Acre Harrowing: Acre Cultivating... Acre Planting & Drilling Planting Corn, With Fertilizer: Conventional-Till... Acre Minimum-Till... Acre No-Till... Acre Planting Corn, Without Fertilizer: Conventional-Till... Acre Minimum-Till... Acre No-Till... Acre Planting Soybeans, Without Fertilizer: Conventional-Till... Acre Minimum-Till... Acre No-Till... Acre Drilling... Acre Pennsylvania s Machinery Custom Rates - Page 3 PA Ag Statistics Service, NASS, USDA

12 Custom Rates: Selected Farming Operations, Pennsylvania, 2003, Continued Job Basis of Charge Mountain Section (Dollars) Valley Section (Dollars) State (Dollars) Range (Dollars) Planting & Drilling (Continued) Drilling Small Grain, Without Fertilizer Conventional-Till... Acre Minimum-Till... Acre No-TIll... Acre Seeding Alfalfa, Clover, Etc.... Acre Broadcast Seeding (On Grain Fields)... Acre Cleaning Grain Seed: With Treatment... Bu Without Treatment... Bu Spraying Ground Equipment: Spraying for Weed Control Excl. Material Acre Spraying for Corn Borer... Acre Spraying for Spittle Bug or Alfalfa Weevil Acre Miscellaneous Grain Hauling: Local... Bu Long Distance... Bu Grain Storage... Bu. Per Month Stalk Shredding, P.T.O.... Acre Bushhogging... Acre Spreading Bulk Fertilizer: Dry... Acre Liquid... Acre Side Dressing... Acre Lime... Acre Grinding Feed: Corn, Oats or Barley... Cwt Corn & Cobs... Cwt Cobs... Cwt Additional Charge for Mixing... Cwt Machine Tiling (No Tile)... Foot Back Hoe... Hour Sawing Wood, Chain Saw... Hour Post Hole Digging... Hole Manure Loading, Solid... Hour Manure Spreading, Solid... Hour Manure Pumping... Hour Manure Spreading, Liquid... Hour Bulldozing... Hour Average Size... HP 100 HP 125 HP 120 HP HP Tractor Rental Rates: Less than 80 HP... Hour to 120 HP... Hour to 160 HP... Hour Greater than 160 HP... Hour Pennsylvania s Machinery Custom Rates - Page 4 PA Ag Statistics Service, NASS, USDA

13 Machinery Cost Evaluation Risk & Profit Conference, August 2002 By Luc Valentin and Mark A. Wood Objective of the study Studies have shown that production cost in agriculture is one of the determining factors of the profitability of different enterprises. The last two years have been a good example to demonstrate that the difference in farm profitability is closely correlated to cost control. Some production costs are fairly easy to identify; direct crop cost is one of them. Other costs that are more difficult to accurately quantify are overhead and machinery costs. The objective of this study is to identify and quantify the level of machinery cost required to produce different crops in Kansas. One alternative in determining machinery cost would be to use a budget. The difficult part of budgeting is the allocation of indirect costs. Repairs for example, how should they be allocated between different enterprises? What about the depreciation of a piece of machinery that is used on multiple crops? The answer to these questions is not easy and requires more than a simple budget method approach. This study is based on data collected by the six regional Farm Management Associations across Kansas to estimate a model linking acres of various crops produced and total machinery cost. To achieve our objective, we have constructed a model which, based on the different crops grown on the farm and how much income is generated from custom work, will estimate a benchmark of overall machinery cost for the specific farm. Presentation of the variables The data used in this research is from the Kansas Farm Management Association (KFMA) database. This database is actual farm record data collected across Kansas. Every year for each of the farms in the data set, the acreage of the different crops planted is collected as well as the expenses related to machinery. The variables used in this study are described as follows: Crop acreage: Acreage planted to each of the individual crops used in the study: irrigated wheat, nonirrigated wheat, irrigated corn, non-irrigated corn, irrigated sorghum, non-irrigated sorghum, irrigated soybeans, non-irrigated soybeans, irrigated alfalfa hay, non-irrigated alfalfa hay, irrigated other hay, non-irrigated other hay, irrigated other cash crop, and nonirrigated other cash crop. Machine Work Receipts: Total income generated from machine work performed for other people. Machinery Cost: Machinery cost is in fact an aggregated variable generated from other variables. In this study machinery cost is defined as: crop share of machinery repairs, gas-fuel-oil, farm auto expense, motor vehicle depreciation, machinery-equipment depreciation plus crop 1

14 machine hire and lease expenses, plus opportunity interest charge on crop machinery investment. Machinery cost can vary significantly from year to year due to unexpected repair expenses or the purchase of an expensive piece of machinery. Therefore, to minimize the effects of this problem, a three-year average ( ) has been generated for each farm in the data set. Machinery cost can also be affected by the allocation between livestock and crop enterprises. Farms with more than 90% of the labor devoted to crop production were selected for this study to reduce the effect of livestock enterprise allocation issues. Descriptive statistics Table 1: Comparison of Selected Variables for Average and Six Associations Average All Northwest Southwest North Central South Central Northeast Southeast Crop Acres 1,418 1,739 1,877 1,034 1,371 1,098 1,309 Harvested Acres 1,241 1,256 1,291 1,013 1,314 1,082 1,462 Net Farm Income $ 35,781 $ 47,333 $ 41,771 $ 21,741 $ 32,891 $ 33,990 $ 37,358 Crop Labor Percentage 98.8% 99.1% 99.6% 97.9% 99.0% 98.2% 98.2% Total Crop Machinery Investment $159,347 $ 168,938 $ 160,017 $120,163 $169,898 $157,120 $ 163,779 Motor Vehicle Depreciation $ 11,555 $ 11,799 $ 11,227 $ 10,078 $ 10,036 $ 13,464 $ 14,340 Machinery-Equipment Depreciation\ $ 9,444 $ 11,552 $ 11,202 $ 7,250 $ 9,627 $ 8,437 $ 7,361 Machinery Repairs $ 17,990 $ 17,135 $ 19,724 $ 13,862 $ 20,537 $ 15,464 $ 17,829 Irrigation Repairs $ 1,772 $ 2,865 $ 4,243 $ 333 $ 1,740 $ 412 $ 69 Machine Hire $ 12,961 $ 19,522 $ 16,941 $ 11,414 $ 13,937 $ 6,338 $ 8,304 Gas/Fuel/Oil $ 10,390 $ 10,472 $ 12,028 $ 7,765 $ 11,132 $ 9,016 $ 10,589 Adjusted Total Crop Machinery Cost 1 $ 75,604 $ 87,186 $ 88,882 $ 53,957 $ 79,716 $ 63,911 $ 70,358 Machine Work Receipts, Dollars $ 6,868 $ 7,887 $ 5,562 $ 3,706 $ 8,933 $ 6,432 $ 6,418 Wheat, Total Irrigated Acres Wheat, Total Non-irrigated Acres Corn, Total Irrigated Acres Corn, Total Non-irrigated Acres Grain Sorghum, Total Irrigated Acres Grain Sorghum, Total Non-irrigated Acres Soybeans, Total Irrigated Acres Soybeans, Total Non-irrigated Acres Alfalfa Hay, Total Irrigated Acres Alfalfa Hay, Total Non-irrigated Acres Other Grain, Total Irrigated Acres Other Grain, Total Non-irrigated Acres Other Hay, Total Irrigated Acres Other Hay, Total Non-irrigated Acres Other Cash Crops 2, Total Irrigated Acres Other Cash Crops 2, Total Non-irrigated Acres Percentage of Farms in the data 12.9% 18.5% 11.4% 28.8% 18.1% 10.4% 1 Adjusted Total Crop Machinery Cost is Total Machinery Cost as defined by the Kansas Farm Management guide plus machine hire receipts (which are subtracted from machinery cost originally). 2 Pinto Beans, Sunflowers, Cotton, etc. 2

15 A summary of selected characteristic variables of the 603 farms in the study is presented in Table 1. The Average column represents the average for all the farms included in the study. The Association columns represent the average value for the farms from the specific associations included in the study. For example, the Machinery Investment average for all Associations is $159,347, while Machinery Investment varies from $120,163 to $169,898 for North Central and South Central respectively. The crop acreage variables have been used also to generate the graphs presented in Appendix 1 3. These pie charts represent the crop mix of the average crop farm in each of the Associations. Moving from West to East across Kansas the irrigated acreage decreases out of the crop mix and is replaced by non-irrigated crops such as milo or soybeans. It is important to notice that in the western associations the unused acres represent about one third of the total acres on the farm, which is supportive of the observed common practice of a three-year rotation. The level of specialization of the farms in the various crops grown in Kansas is shown in Appendix 2. Wheat, as expected, is a crop present at a fairly high level in most of the farms in the data set. Net farm income, total acreage, and machinery cost distributions are presented in Appendix 3. These graphs show a wide diversity in size, which contributes to a wide diversity in net farm income as well as machinery cost. However, there remains a level of diversity in machinery cost as well as net farm income among farms after the influence of size is reduced by evaluating on a per cropped acres basis. These relationships on a per acre basis are displayed in Appendix 4. Presentation of the model The model estimated in this study uses the total crop machinery cost as a function of the acres of the different crops as well as a variable defined as the logarithm of the sum of the crop acres. Total machine work income is included as an independent variable to quantify the influence machine work activities have on total machinery cost. The model can be written as: CropMachCost a a a ISg NIA NIOCC = a IrrSorg + a IW NISg NIrrAlfalfa + a IrrWheat + a NIrrSorg + a IOH NIrrOtherCashCrop+ a IrrOtherHay + a MWI NIW ISy NIrrWheat + a IrrSoy + a NIOH NISy MachWorkInc + a IC IrrCorn+ a NIrrSoy+ a NIrrOtherHay + a lsa IA IOCC NIC ln( SumAcres) NIrrCorn+ IrrAlfalfa+ IrrOtherCashCrop+ The coefficients being estimated are presented in Table 2. The estimation of the coefficients has been done under certain constraints so that the variables with limited observations were not skewed one way or the other. For the purpose of this study, the machinery cost of irrigated crops was limited to twice the machinery cost of non-irrigated crops. Irrigated corn machinery costs were constrained at a ratio 2.5. Finally, the lower bound for machinery costs was set at $20 per acre. The model s coefficients and relevant statistics are presented in Table 2. The Root Mean Squared Error (RMSE) of the model is $23,941, which means the predicted Total 3 The graphs represent the 6 Farm Management Associations and are located on the sheet appropriately to the location of the association on the Kansas map. 3

16 Crop Machinery Cost is expected to be +/- $23,491 68% of the time. All coefficients are statistically different than zero at the 5% level with the exception of other hay, both irrigated and non-irrigated. Table 2, Coefficients Estimate table : Parameter Estimate Std Err t Value Pr > t a IW <.0001 a NIW <.0001 a IC <.0001 a NIC <.0001 a ISg <.0001 a NISg <.0001 a ISy <.0001 a NISy <.0001 a IA <.0001 a NIA <.0001 a IOH a NIOH a IOCC E E16 <.0001 a NIOCC E E16 <.0001 a MWI <.0001 a lsa <.0001 The interpretation of this table is fairly simple. First there is an overhead machinery cost of 1568 times the logarithm of the total acreage of the crops used in this study. Then if you earned $1,000 as machine work, you should expect your machinery cost to increase by about $876. Finally, depending of your crop mix, each crop acre would increase your machinery cost by the value of the coefficient as presented in Table 2. One acre of nonirrigated wheat costs $40.02, on the average, whereas one acre of irrigated corn costs $ Application of Model Four different example farms are included in Table 3. These farm examples are representative of farms included in the Northwest Association data. These sample farms will help illustrate how the model works and might be applied. A blank column is included so you may estimate the machinery cost for any farm using this model. To do so, multiply the Coefficient Multiplier by the acres for each specific crop and sum these numbers. Farm 1, is a large farm totaling 2630 crop acres. The acres under irrigation equal 91.1% of the crop acres. There is a small sampling of summer fallow acres on the nonirrigated land. This farm has relatively new machinery and aggressively maintains a good line of machinery. Timeliness is important to this operation. Two men operate this farm and they harvest all the acres with one combine and trucking is hired--a unique combination, but efficient. Several capital purchases have been made using capital lease purchase agreements. 4

17 Farm 2 is a modest sized irrigation farm totaling 1087 acres. The acres under irrigation represent 54.7% of the total crop acres. This is more typical of irrigated farms in Northwest Kansas. This farm uses a continuous no-till crop rotation on the non-irrigated acres. Machinery cost for this farm is the fourth largest of the Northwest Association three-year average. Repair cost on this farm averages over $50,000 per year. These are farm operators that have a real desire to work on things to make them better, in other words shop junkies. Or we could have a farm with old machinery that requires considerable repairs, but major repairs should be capitalized. Table 3, Four Example Farms from Northwest Association Crop Coefficient multiplicator Farm 1 Farm 2 Farm 3 Farm 4 Your farm Wheat, Total Irrigated Acres Wheat, Total Non-irrigated Acres Corn, Total Irrigated Acres Corn, Total Non-irrigated Acres Grain Sorghum, Total Irrigated Acres Grain Sorghum, Total Nonirrigated Acres Soybeans, Total Irrigated Acres Soybeans, Total Nonirrigated Acres Alfalfa Hay, Total Irrigated Acres Alfalfa Hay, Total Nonirrigated Acres Other Hay, Total Irrigated Acres Other Hay, Total Nonirrigated Acres Other Cash Crops, Total Irrigated Acres Other Cash Crops, Total Non-irrigated Acres Machine Work Receipts, Dollars 0.88 Total Acres of the included crops Logarithm of the total acres variable Total Estimated Machinery cost $ 235, $ 102, $ 107, $ 27, Estimated Machinery Cost per Acre $ $ $ $ Actual Machinery Cost per Acre $ $ $ $ Farm 3 is a larger non-irrigated farm that operates 2710 acres. This farm is a typical wheat/no-till milo/fallow farm. A smaller acreage of no-till corn is involved as well. This farm maintains good machinery without keeping the paint brand new. They have older combines (14XX & 16XX series rotary IH), that harvest most of their acreage. Tractors and critical implements are less than 10 years old. They do almost all of their own spraying. This has been an important contributor to cost savings in no-till farming in Northwest Kansas. 5

18 Farm 4 is a smaller non-irrigated farm with 522 acres of crop production. This farm operates in a more old fashioned way by producing mostly wheat and fallow, with a small amount for cane feed and sunflower. Farm 4 operates aged equipment from the 80 s and hires all harvesting. Contributors to higher machinery cost for farm 4 are the lack size efficiency and high auto expenses. The farms listed in Table 3 were selected as representative of the variation found in Northwest Kansas. The goal here was to show the ability of the model to accurately predict the machinery cost of selected farms when only the acres of crops produced and the machine work income are taken into consideration. Farm 1 and farm 3 had machinery costs that were accurately predicted by the model. Both Farm 1 and 3 represent farms where the size is larger and the operators do most of their own work, especially harvesting. Farm 2 has abnormally large repair cost and farm 4 is not representative of a full time farm for Northwest Kansas. Compairson of Actual vs Predicted Machinery Cost Example Farms, NW Association $160 $140 $ Dollars per Crop Acre $120 $100 $80 $60 $40 $82.26 $89.70 $97.07 $34.96 $39.29 $69.14 $49.53 $20 $- Farm 1 Farm 2 Farm 3 Farm 4 Example Farm Actual Machinery Cost per Acre Estimated Machinery Cost per Acre Figure 1 The same four farms are displayed in Figure 1. This bar chart shows the actual machinery cost in the darker shaded bar and the predicted machinery cost in the lighter shaded bar. The model predicted with reasonable accuracy the machinery cost of farm 1 and farm 3, but underestimated machinery costs when compared to actual for farms 2 and farm 4. 6

19 Comparison of Predicted Machinery Cost, Average Crop Mix, by Association ( ) Dollars Per Acre $120 $110 $100 $90 $80 $70 $60 $50 $40 AVG NW SW NC SC NE SE $ Crop Acres of Production Figure 2 The relationship of machinery costs and crop acres is illustrated for the six associations and the average of all associations in Figure 2. The average crop production acreage mix for each Association (Table 1) was used across the acreage size categories along the bottom of the chart. Essentially all the data in Figure 2 decreases at a decreasing rate based on the logarithm of the total crop acres in a particular farm example. Northwest and Southwest Associations have the crop mix with the most expensive machinery cost. These two Associations also represent the majority of the irrigated acreage represented in the Association data. Northcentral and Southeast Associations compete for the lowest machinery cost. Northeast and Southcentral most closely follow the average line in the middle of the chart. The decreasing machinery cost displayed in Figure 2 is dramatic from 300 acre to 1200 acres. The shaded columns of Table 4 show the predicted machinery cost savings of moving from 300 to 600 acres, 600 to 1200 acres and from 1200 to 2400 acres. The economic benefit of doubling the crop production acres from 300 to 600 is nearly double that of moving from 600 to 1200 acres and the same is true as the size increases from 1200 to Table 4, Comparison of Predicted Machinery Cost, by Association, (data for Figure 2) 600 to 1200 to to ACRES AVG $ $ $ $ $ $ $ 6.69 NW $ $ $ $ $ $ $ 6.67 SW $ $ $ $ $ $ $ 5.64 NC $ $ $ $ $ 8.11 $ $ 7.07 SC $ $ $ $ $ $ $ 6.60 NE $ $ $ $ $ $ $ 7.58 SE $ $ $ $ $ $ $

20 These results of the machinery cost model could be useful in determining if a farmer can justify paying a premium to increase the acres in his farm. The additional benefit in predicted machinery cost savings per acre could be considered as part of the land acquisition package. For example, the farm that has 300 acres in Northeast Kansas could, according to the model in this study, incorporate an expected machinery cost savings of over $20 per acre for the first 300 additional acres. The same evaluation of additional land for a farm with 1200 acres in Northeast Kansas could anticipate a machinery cost savings of only $7 per acre in comparison. Machinery Cost and Size Efficiency, By Association ( Avg) Dollars/Crop Acre $80 $70 $60 $50 $40 $30 $20 $10 $70.92 $69.53 $61.57 $60.17 $60.55 $53.51 $ % 80% 78% 76% 74% 72% 70% 68% 66% % Size Efficiency $- 64% AVG NW SW NC SC NE SE Association/Avg Crop Acres Predicted Machinery Cost % Size Efficiency Figure 3 The relationship of the average machinery cost, as predicted by the model for crop farms in each of the six associations, is shown in Figure 3. The average cropped acres is represented in the number just below the Association abbreviation. Southeast has the lowest machinery cost predicted for the average sized farm operating with the average crop mix for that association. The Southeast Association has the largest average number of crop acres. This is accomplished by a significant number of double-cropped acres, especially soybeans. The Northcentral Association has the second lowest predicted machinery cost per acre, but they are also the smallest crop farms as measured by cropped acres. Northwest and Southwest Association farms have a significant number of acres in fallow, which are not part of the crop acres in this study. The cost of fallow is included in the machinery cost computation and is assumed part of the wheat acreage cost coefficient. Figure 3 also presents the percent of machinery cost efficiency obtained by the average size crop farm using the average crop acreage mix in each Association. This percent is based on the function of the curved machinery cost line predicted in Figure 2. The percent size efficiency line in Figure 3 represents what percent each Association has 8

21 obtained at the average size, using the average crop mix for that association, when compared to the 6000 acre sized farm on the end of the curve in Figure 2. The objective is to observe how efficient is the average size crop farm in the Associations. The Southeast Association, with the largest cropped acres and the lowest predicted machinery cost per acre, has obtained on 1459 acres 81% of the efficiency found on a 6000 acres farm. The Northcentral Association has a low predicted machinery cost but when applied to a 1005 acres crop base the average crop farm has only reached an efficiency of 71% of the efficiency possible on a 6000 acres farm. Northwest, Southwest, and Southcentral had predicted efficiency for the average sized crop production is in the 78%, 78% and 79% levels respectively. Conclusions The purpose of this study is to quantify the cost of machinery involved in the production of common crops produced in Kansas. Irrigated crops, particularly irrigated corn, were predicted to have higher machinery costs than normally observed in existing budgets or enterprise summaries. Regional differences among the six Farm Management Associations add variety and perspective to the model. The Southeast Association members, with the increased farming intensity of double cropping, have found a way to push the predicted machinery cost for the average sized crop farm below the $50 per acre level. Efficiency due to size of farm and the utilization of machinery is a frequently discussed topic. The model developed in this study demonstrates again the decreasing at a decreasing rate nature of machinery cost per acre. It is interesting though to note that the number of acres necessary to acquire the majority of the efficiencies in predicted machinery cost is at or just below the average size crop farm in four of the six Associations. The perceived economic benefits of increasing size to lower machinery cost is very true when the farm size is below 1000 acres. The machinery cost estimated in the model for the average farm decreased from $97.52 per acre for the 300 acres farm down to $61.93 for the 1200 acres farm. This represents a cost savings of $35.59 per cropped acre on the average across Kansas Farm Management Association crop farmers. This level of machinery cost savings is a significant economic factor contributing to land acquisition power of the larger farms over the smaller farms in many communities. On the contrary, those farms that have already reached a size of 1200 acres cannot expect significant machinery cost savings due to increasing the acres they already farm. The results of this study indicate that the predicted machinery cost savings to the average farm of increasing acres farmed from 1200 to 2400 would be $6.69 per acre. It is the intent of this study that the machinery cost coefficients developed in the model will contribute to establish benchmarks for machinery cost involved in the production of principal crops in Kansas. The machinery cost coefficients in Table 3 can be used to quantify the anticipated improvement in machinery cost efficiency when considering expanding a farm operation, especially when dealing with smaller crop farms. 9