The Impact of Machinery Expense to Your Bottom Line
Measuring ROI with every pass across the field
By 2023, it’s projected that nearly 12 million agricultural sensors will be installed globally and the average farm will generate half a million data points per day.
With this increased access to data comes more opportunity to analyze how operational expenses impact a farm’s bottom line, especially for hard to track expenses like machinery and labor, which are also among an operation’s largest investments.
While benchmarked equipment costs vary, for a farm with 3000 crop acres, machinery investment per acre is typically around $125 per acre. With that kind of expense, the most successful farm managers know that they have to measure the ROI of every pass across the field.
In our recent webinar, “How To Chase Yield While Staying Profitable,” we asked our panelists, Matt Essick and Dr. Gary Schnitkey, to discuss the impact of progressive agronomy on profitability and, specifically, to explain how more profitable farms manage their machinery costs. Matt Essick is a Pioneer agronomy manager with more than 20 years of agronomic experience, ranging from seed production to agronomy support. Dr. Gary Schnitkey is a professor and farm management specialist in the Department of Agricultural and Consumer Economics at the University of Illinois.
Machinery investment per acre typically decreases the bigger your farm. Knowing that, however, doesn’t always inform buying decisions, Dr. Schnitkey explains. “I’ve seen a lot of machinery decisions based on tax considerations and the assumption that if you buy equipment you’re getting deprecation to write off against income taxes.”
With commodity prices coming down since 2013 and machinery costs rising, Dr. Schnitkey questions this strategy long-term. “Better to make machinery purchases less a tax thing and focus on having just the right compliment to cover your acres,” he adds.
“When it comes down to it, the biggest difference in profitability comes on the machinery management side and keeping everything in line with the size of the farm.” He recommends looking at the machinery investment per acre of similarly sized farms. For example, in the Midwest, one combine per 1,800 to 2,000 acres is typical. Above 2,000 acres he suggests two tractors (newer ones that can tillage and pull grain carts).
“And if you’re going to oversize anything,” adds Dr. Schnitkey, “oversize the planter, not the combine.”
Know when to buy
Before you buy, consider whether the new equipment purchase fits into your budget. Simplest way to figure this out is to estimate the return on investment of that purchase (Dr. Schnitkey recommends this resource). A negative ROI tells you that equipment purchase most likely won’t generate enough revenue to cover its cost. In this case, you’re better off waiting or looking at other options like renting or hiring a custom crew.
Another factor to consider is how much downtime your farm can afford. Repairs take time and impact productivity, particularly if you have a critical piece of equipment that can make you a lot of money in a short amount of time. “Given our short planting windows in the spring, having a planter or tractor that’s not going to cause you problems is critical,” said Essick.
As for timing purchases, Dr. Schnitkey finds replacing most equipment after three years and longer to be economical. “Surprisingly, if you compare profitable versus less profitable operations, we don’t see a lot of difference in buying patterns. Assuming the equipment is properly sized to the operation, with gently used versus new, you’re just trading off depreciation for repairs.”
Understand how machinery affects field level profitability
Profitability comes down to getting higher yield at a lower cost per acre, and understanding what’s driving that. Adds Schnitkey, “We see profitable farms adopting the latest technologies to evaluate every agronomic decision while keeping their costs in line.” Historically, machinery and labor costs were hard to measure at a field level. With technology, that has changed. Now farms can use technology to see the impact of machinery and labor hours on field profitability and know what fields contribute most to the bottom line and which don’t.
“Given that labor and equipment (L&E) expenses can account for 15 to 25 percent of total production costs, and the increase in machine cost estimates, it’s more important than ever to fully understand them,” asserts Dr. Schnitkey.
Historically, it was hard for farmers to accurately factor equipment and labor costs into field level financials. Now with Granular Business, farmers can use the labor and cost tracking features to easily assess the impact of L&E on field profitability. You can digitize your entire fleet and see differences by field to expose topography and other challenges that impact productivity.
To date, over 25 percent of Granular Business farms are using it to track equipment costs, and almost as many are monitoring labor expenses, for a simpler, more accurate assessment of the impact those costs have on field-level profitability.
See how Granular Business can help you track L&E expenses
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