Key Questions About Farm Machinery --Chapter 22

1. What are the alternatives for acquiring machinery 2. What are the advantages of new versus used? 3. What factors influence the best size of machinery?

Machinery Costs per Acre

High Third Ownership $45.48 Fuel & lube 8.42 Repairs 15.38 Custom hire 4.84 Total cost / acre $74.12 Investment /acre $268 Low Third $25.27 5.61 9.79 2.63 $43.30 $152

Acquiring Farm Machinery

Ownership Rental (short-term) Leasing Rollover Custom Hire Joint Ownership Trade Labor

Advantages of Owning
More control over use More convenient Less expensive for high use or long life machines Tax benefits from depreciation and interest Build up equity value

Short-Term Rental
Pay only for time machine is actually used Pay by the hour or day No investment Cheaper for low use or specialized machines

Long Term Leasing

Make annual lease payments (20-25% of new price) First payment when lease begins Leases usually run 3-5 years Option to purchase at end of lease Operator pays for repairs, insurance, etc. Example on page 412

Leasing Machinery
Advantages Lower initial investment Can trade frequently Payments usually lower than loan payments Know machine before purchasing Payments tax deductible Disadvantages More expensive if you plan to own it Do not build equity Locked into lease period

Advantages of Custom Hire

No long term investment No repairs or maintenance Cheaper for low use items Get operator labor Pay only for acres actually farmed

$ / acre $160 $140 $120 $100 $80 $60 $40 $20 $0

Own vs. Custom Hire--Combine

Own Custom

100

200

300

400

500

600

700

800

900

1000

1100

1200

1300

1400

1500

Acres

Rollover Purchase

New machine is purchased , usually by company credit plan Used one season, then traded for a new model Difference paid depends on hours of use on old unit

Joint Machinery Ownership

Spread ownership costs over more acres Increase labor supply Owner/operators can specialize Less investment for each owner Must be able to schedule use Must adjust costs if use is not proportional to ownership Some farmers form machinery co-ops.

Trade Labor for Machinery

No investment or debt No cash costs Use excess labor Takes about 5-8 acres of labor to equal the value of one acre of machinery use

Used Machinery
Lower investment and ownership costs Higher repair costs Lower reliability Must trade more often Requires more mechanical skills

Machinery Costs Decrease

$35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Repairs Fuel & lube Interest Deprec.

Age

Figure 1. Annual costs for a 180-hp tractor

When to Trade Machinery

Repair costs are high Machine is unreliable Machine is obsolete Need more capacity Cash flow is favorable Need tax deductions

Machinery Capacity
Small machinery causes timeliness losses Large machinery has excess ownership costs Bottleneck is suitable field days Least-cost machinery set can complete: tillage and planting in 20-25 days harvesting in 25-30 days

Least-cost Machinery Set

$160

Machinery cost per acre

$140

$120

$100

Total costs

$80

$60

Timeliness costs

Minimum cost point

Ownership costs

$40

Operating costs
$20

Labor costs
$0

Machinery size

Least-cost size

Figure 1. Effect of increasing machinery size on machinery costs