Analyzing machinery costs

Transcription

1 Analyzing machinery costs METHODS FOR CALCULATING AND COMPARING COSTS KATE PAINTER, UNIVERSITY OF IDAHO

2 Do direct seed systems save money? Answer: It depends!

3 Impacts of machinery costs Machinery investment is the 2 nd largest investment after real estate Annual machinery costs are a large part of a farm s total annual costs Ownership costs: depreciation, interest, taxes, insurance, housing, lease payments Operating costs: repairs, fuel, lubrications, labor, custom hire, rental payments

4 Estimating machinery costs Infrequent but large cash outlays $100,000+ for a tractor, $300,000+ for a combine, $200,000 for a selfpropelled sprayer Noncash costs, such as depreciation, can be large as well Ownership (fixed or overhead) costs: Cannot be avoided except by selling the machinery Depreciation: noncash expense that reflects the loss in value due to age, wear, and obsolescence

5 Calculating economic depreciation Average annual depreciation: (cost salvage value)/years of life Not the same as depreciation for tax purposes, which will follow IRS rules Economic depreciation should reflect the actual decline in value

6 Fixed costs of machinery: interest Investing in machinery ties up capital that could be used for something else There is an opportunity cost to capital invested in machinery Could reflect the loan rate or the return on the next best alternative, depending on the source of capital

7 Calculating interest Determine average value of machine (Cost + Salvage Value)/2 Multiply by the interest rate Divide by annual hours of use to get machine interest cost per hour

8 Calculating interest example Purchase price: $40,000 Salvage price: $10,000 Average value: (40, ,000)/2 Average value: $15,000 Multiply by interest rate: $15,000 x 0.05 = $750 per year Divide by hours of use to get interest cost per hour OR Divide by acres of use to get interest cost per acre

9 Machinery insurance costs Annual charge to cover liability coverage, and losses due to collision, fire, theft, hail or wind An insurance cost should be included in the ownership costs even if the owner carries no actual insurance because losses can be expected over time Ball park cost of 0.5% of machine s average value

10 Housing expenses Tractors left outside had a 16% lower trade-in value after 10 years then those left inside in a national study Ball park cost of 1% of annual value could be used More accurately, you could estimate the annual cost per square foot for the machine shed and multiply this by the square footage the machine needs

11 Operating costs for machinery Directly related to level of use Zero if machine is not used Repair costs difficult to estimate Typically increase over time Best source is detailed records of actual repair costs under existing levels of use, maintenance, and cropping pattern Include both parts and labor

12 Fuel and lubrication costs Depends on engine size, load, speed, and field conditions Farm records are the best source of data Estimates can be made based on PTO hp: Gallons per hour = X PTO hp (gasoline) Gallons per hour = X PTO hp (diesel) Costs for lubricants and filters average 10 15% of fuel costs for self-powered machines

13 Acres per hour calculation Acres per hour = (speed (mph) x width (ft) x efficiency (%)) 8.25 Example: how many acres per hour can you cut with a swather that is 12 wide, operated at 8 mph, with 82% efficiency? 8 x 12 x = 9.54 acres

14 Benefits of leasing Reduces the amount of capital tied up in fixed assets Generally lease payments are lower than a loan payment would be for the same equipment Reduces the risk of obsolescence Leasing may have a lower after-tax cost for operators with little taxable farm income, thus cannot take advantage of Section 179 deductions Lease payments can be subtracted as an expense from taxable income Leases must be set up correctly in order to do this; restrictions apply

15 Leasing machinery: capital lease In a capital lease, the machine can be purchased at the end of the lease term In order to be able to deduct capital lease payments on your income tax, this purchase must be OPTIONAL Otherwise, the lease is seen as a sales contract, and depreciation and interest can be deducted from your income taxes, but not the lease payments

16 Disadvantages of leasing Leasing machinery is not well established in many areas Machines and models you need may not be available Lease payments are operating expenses, and a late payment may cause cancellation of the lease Operator may not be able to cancel the lease without paying a substantial penalty Leasing does not allow the operator to build equity in the machinery

17 Example: Break-even point for ownership Calculating break-even: total annual fixed costs custom rate variable costs per unit Ownership (fixed) costs for a combine are $21,579 per year. Variable costs are $7.82 per acre Custom hire rate = $30 per acre $21,579 = 973 acres $30 - $

18 Cost per unit ($) Custom hire Machine ownership 0 Breakeven Acres or units of output 18

19 Replacement decisions: when to replace Present machine is worn out Machine is obsolete Costs are increasing with the current machine Capacity is too small Income tax considerations In a high profit year, machines may be replaced to take advantage of tax reductions Cash flow Replace in years of above-average cash income 19

20 Strategies for machinery replacement Keep and repair Usually the least-cost strategy, particularly if repairs can be done on the farm. Risk of a breakdown at a critical time might be high, however Trade often For operators who desire newer and more reliable equipment. Leasing may be a good strategy. Trade when income is high Invest each year 20

21 Activity Based Costing (ABC) Calculate your costs by operation Allows easy comparison for decisions such as Custom hiring machinery operations No-till versus conventional tillage Potential savings from changing machinery

22 Costs/Acre* - Conventional Seeding - Spring Peas Operation Cost/Acre Fall Plow $18.00 Spring Harrow 3.50 Spring Cultivate 5.00 Cultivate/Spray Incorporate nd Incorporation-Cultivator 5.00 Seed-Conventional Drill Harrow 3.50 Roller/Packer 3.00 Total Costs Per Acre $56.50 Costs derived from activity based accounting/industry standard rates

23 Costs/Acre* - Direct Seeded Spring Peas Operation Cost/Acre Fall Heavy Harrow $4.00 Fall Roundup-Green Bridge 7.00 Custom Hire-Direct Seed Drill Harrow 3.00 Roller/Packer 3.00 Total Costs Per Acre $35.50 Other Qualitative Factors: less water loss, less compaction, less erosion risk Savings/Ac = $21 Costs derived from industry standard rates

24 Information Needed to Do Analysis: Operating Costs Fuel Consumption per hour Cost of fuel Labor cost Primary operators Support personnel Repairs and Maintenance Parts & Labor Other Equipment Support, Overhead Costs ABCS OF FARMING - COPYRIGHT 2007 WITTMAN CONSULTING

25 Information Needed to Do Analysis Productivity of Machine Operation Working width Speed Field efficiency % Large fields increase efficiency % Precision ag tools increase efficiency % Annual usage of power unit all operations ABCS OF FARMING - COPYRIGHT 2007 WITTMAN CONSULTING

26 Information Needed to Do Analysis Ownership costs Cost of power unit/implement Planning Horizon/useful life Salvage value Cost of capital or borrowing Insurance & housing costs Tax rates WARNING: Use YOUR costs NOT economic costs from someone else s data NOT replacement cost Annual usage of power unit all operations ABCS OF FARMING - COPYRIGHT 2007 WITTMAN CONSULTING

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31 System 8: Organic Winter Wheat (Madsen) Total Total Variable Fixed Machine Materials/ Cost of Operation Date Cost Cost Cost Labor Services Operation 23'Chisel Plow 9/16-17/08 $ 2.81 $ 2.52 $ 5.33 $ 1.86 $ ' Rotary Harrow 9/17/08 $ 1.32 $ 1.63 $ 2.95 $ 1.01 $ ' Rotary Harrow 10/7/08 $ 1.32 $ 1.63 $ 2.95 $ 1.01 $ ' Disk Drill 10/20/08 $ 3.93 $ 3.22 $ 7.15 $ 1.83 $ $ lbs $0.62/lb 50' Rotary Hoe 4/10/09 $ 0.57 $ 0.69 $ 1.26 $ 0.31 $ ' Rotary Hoe 5/4/09 $ 0.57 $ 0.69 $ 1.26 $ 0.31 $ ' Rotary Hoe 5/13/09 $ 0.57 $ 0.69 $ 1.26 $ 0.31 $ ' Rotary Hoe 5/26/09 $ 0.57 $ 0.69 $ 1.26 $ 0.31 $ ' Combine (grain) 8/25/09 $ 6.37 $ $ $ 3.02 $ /4-Ton Pickup Annual $ 0.53 $ 0.43 $ 0.96 $ 1.20 $ 2.16 Miscellaneous use. Overhead Annual $ 0.93 $ 0.56 $ % V.C. & Labor Land Taxes Annual $ 5.50 $ 5.50 Land Cost Annual $ $ $1,500 times 4%. Total Cost $ $ $ $ $ $ Variable Cost $ (including labor & materials

32 Enterprise budgets

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34 Machinery variable costs

35 Machinery fixed costs

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39 Average returns by rotation:

40 Grower Example: Derek Schafer Uses Activity Based Costing by machine Developed tools for comparing leasing vs purchasing Comparison of direct seeding vs conventional

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43 Cost for cultivator, pulled by 450 hp tractor:

44 Comparison of conventional vs no-till operations for wheat: 11% savings for no-till production

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47 Kate Painter Extension Ag Economist Cell: (509) Web: