Farm Machinery Senior Class: Budgeting and Selecting

Investing in machinery at a farm is a major decision REGARDLESS of scale of the farm! Think of buying snow graders for road construction for a non-snow country? Investing in machinery is not only about one affording the shop price but whether it's economic for the farm. This article is about making smart decisions about how to acquire machinery, when to trade, best capacity to invest in.

First things first. One must know the best machinery for the purpose. The key operations that require machines are tillage,planting, weed and pest control, harvesting. Tillage implements prepare seedbed, destroy early weed growth. Planters ensure consistent spacing of seed and appropriate application of fertilizers. Harvesters reap clean and undamaged grain while minimizing field losses. Performance of machines depends on skill of operator, weather and soil conditions.

Machinery Costs

Machinery costs consist of Ownership and Operating costs. It is not about the dollar figure but minimizing the cost per acre, and reducing the ratio of cost per acre to sales per acre.

Ownership/Fixed Costs

These include depreciation, interest, taxes, insurance, housing or shelter for the equipment. These costs do not change as the machine sees more use. However fixed costs per work done decrease as the hours or acres worked increase. For example,the same machine that pays $400 per year, costs less if it does more work because it generates the money that pays the costs. These costs increase with size of machine and investment>bigger machine, bigger housing, insurance.
Principle: Buy machinery that does a lot of work for the farm or has less downtime.

Interest and  Depreciation

The lender determines the interest. But if you use your own capital to purchase machinery, the rate depends on the opportunity cost for capital elsewhere in your business. Inflation reduces cost of capital since loans can be repaid with cheaper dollars.

Capital recovery is the money that would have been set aside each year to repay value lost due to depreciation and paying interest. Another important term is the salvage/scrap value- the estimate value of the machine at the end of its useful life. Depreciation becomes the difference between the initial value and the salvage value, then divide it by number of years between purchase and salvage(economic life of machine, taken to be between 10_15 years). Interest is calculated as a percentage of the average value of the machine, which found by adding the new price and salvage value of the machine and then dividing by two.

Housing and Insurance

Insurance allows for replacement in case of disaster such as fire. An uninsured risk disadvantages the whole farm business. Properly sheltered equipment has lower depreciation rate and higher salvage or trade in value as well as less repairing costs. For simplifying Are calculated as 1% of the sum of purchase price and salvage value.
Principle: Insurance and Housing costs secure the machinery investment reduce other costs.

Operating/Variable Costs

Include Fuel, lubricants and repairs.Operating costs per acre change very little as machinery size change. Using larger machinery consumes more fuel but this is offset by the fact that more acres are covered per hours. Thus operating costs are of minor importance when deciding what size of machinery is best suited to a certain farming operation.

Repair and Maintenance

These depend on soil type, climate and vary from farm to farm depending on management policies and operator skill.  The best way to estimate your repair costs is your own past experience .

Fuel and Labour

For fuel costs, the easiest way is to use the standard fuel consumption rate for that machine per acre and multiply that by cost per litre to get cost per acre. cost per acre is then multiplied by the acres to be covered over the year to give total cost of fuel per year.

Adding all these costs gives you an idea of what your farm machinery investment is. Suffice to say investing more than you get per year is equivalent to economic suicide.  Another rule of thumb is that the total annual cost,(both operating and ownership) will usually be about 25-30% of the purchase value of the machine.

Let me categorically mention that the method I submitted above is only an estimation. The decision to buy machinery invariably involves the assessment a wider range of factors. Many of which are not quantifiable for instance, machine breakdown risk, timeliness costs, health and safety, comfort and easy of use to mention a few. One other thing: for large sized farms, as machines become larger, the cost per acre diminishes as shown on the graph below.

 I hope this information will add a little more objectivity in your machinery investment decisions. Put your questions in the comments box and lets have a conversation.

My next article, I will present a simple worksheet for the above estimation methods as well as standard rates in our Zimbabwean context. Let me know other areas that interest you around this topic.