Managing Machinery Costs to Minimize Risk

By | Bank Iowa March 12, 2019

Managing Machinery Costs to Minimize Risk

 

There are things in life you can change and things you can’t.

 

The grain market is one of the latter. In a time with so much uncertainty like today, it is sometimes easy to get caught up in those things over which you have no control. Rather than wrestling with things that we can’t control, it’s important to focus on the things we can.

 

Managing your own crops and input costs is something you can control. Keeping a close eye on crop input efficiency, including machinery, is one good step to take to restore or sustain profitability on your farm. As a variable you can control, it’s something to which you should devote attention and effort instead of factors like market variables that are out of your control.

 

What follows are two necessary calculations to account for in making your next machinery purchase.

 

Know your breakeven price

Efficiently managing machinery costs more efficiently as a way to improve your operation’s financial performance starts by getting a firm grasp on your crop breakeven price. The crop breakeven price is a value comprising your total cost per acre divided by expected crop yield. It’s a value similar to your breakeven yield (total per acre cost divided by expected price), and it shows your relative profit potential and general competitiveness. Your breakeven prices, which can help guide marketing plans and determine exactly what prices you need to generate positive revenue, should include costs that typically go on cash flow statements.

 

For corn and soybean farmers, enterprise budgets can help determine the overall breakeven price you need in order to generate revenue. Enterprise budgets take into account expected bushels and both variable and fixed costs. Those costs include:

  • Seed
  • Fertilizer
  • Crop nutrients
  • Herbicides
  • Grain drying
  • Transportation
  • General machinery
  • Labor
  • Operating capital interest
  • General overhead and living expenses

Include opportunity cost

Once you’ve laid out all the specific line items on the cost side of the equation and your expected yield, you can then calculate what your breakeven price is. If those costs exceed your available market price, look at ways to cut back on some of the variable costs. Machinery is one category, for example, where you can make adjustments throughout the growing season.

 

Then look beyond those hard numbers and consider your opportunity costs to get a feel for not just how your current inputs can be streamlined, but what to avoid cutting altogether in an effort to get more efficient. When you look beyond those hard numbers and to opportunity costs, you can get a feel for not just how your current inputs can be streamlined, but what to avoid cutting altogether in an effort to get more efficient.

 

“Opportunity costs are typically included in enterprise budgets. If we want to benchmark a farm’s costs to those from other farms, it is important to include both cash and opportunity costs in your enterprise budgets. If your operation owns 50 percent of your crop acreage and the operations you are comparing with only own on average 25 percent of their crop acreage, you would not be comparing apples to apples if you did not include opportunity costs for owned land when making the comparisons,” according to Purdue University Center for Commercial Agriculture ag economist Michael Langemeier*. “By including opportunity costs in your enterprise budget, you can determine whether you are fully covering the costs of all inputs. For instance, you would like to know what return you are receiving for your owned land and machinery.”

 

Consider other ownership variables

For your machinery lineup, look to both the cost of ownership as well as operating and opportunity costs. That includes variables like depreciation and interest costs, which can be broken down per acre.

 

“Specifically, you can compute depreciation by dividing crop machinery investment by the average length of life of your machinery and equipment, and interest by multiplying crop machinery investment per acre by an intermediate term interest rate,” Langemeier says. “Of course, these are only proxies for machinery ownership costs. More detailed computations could be obtained using a management or economic depreciation schedule.”

 

These steps can start the process of determining how and where you can make changes to your machinery lineup to get more efficient and maximize the return on your overall machinery investment. Having a basis of comprehensive information on your machinery inputs by following this process can help you not only take concrete steps to streamline your machinery lineup and cut overall costs, but also make informed decisions for things like acreage and plantings.

 

“In addition to estimating breakeven prices, enterprise budgets can be used to make cropping decisions for the upcoming year,” according to Langemeier. “In the short-run, a farm should continue to produce if it is covering variables costs. In the long-run, all costs need to be covered.”

 

* Langemeier, M. “Projected Corn and Soybean Breakeven Prices.” farmdoc daily (8):66, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, April 13, 2018.

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