Farm Management

1. Farm Management Chapter 22 Machinery Management

2. Chapter Outline • Estimating Machinery Costs • Examples of Machinery Cost Calculations • Factors in Machinery Selection • Alternatives for Acquiring Machinery • Improving Machinery Efficiency

3. Chapter Objectives • To illustrate the importance of good machinery management • To identify the costs associated with machinery • To demonstrate procedures for calculating machinery costs • To discuss important factors in machinery selection • To compare owning, renting, leasing, and custom hiring • To present methods for increasing efficiency • To introduce factors that influence when machinery should be replaced

4. Depreciation Interest Taxes Insurance Housing Leasing Repairs Fuel and lubrication Labor Custom hire or rental Other operating costs Estimating Machinery Costs Operating Costs Ownership Costs

5. Reminder • Straight Line Depreciation is (Original Cost- Salvage Value)/ Life • Ownership Interest (Fixed Interest) Interest = Average Value X interest rate Average Value =(Cost + Salvage Value)/2

6. Table 22-1Estimated Salvage Value as Percentage of New List Price Source: ASAE Standards, 2001

7. Capital Recovery Capital recovery = [amortization factor x (beginning value – salvage value)] (interest rate x salvage value) + This is an alternative to calculating depreciation and interest.

8. Amortizing Factor Amortizing factors can be found in Appendix 1 of your textbook. It depends on interest rate and life. Example: 5% interest, 7 year life Amortizing factor is 0.17282

9. Comparison For a machine purchased for $52,000 with a $10,000 salvage value, and a 7 year life, Depreciation is $6,000 per year. Fixed Interest for this machine is $1550. The sum of depreciation and interest is $7550. Using the amortization factor, we get: .17282x42,000 + .05x10,000 = $7758

10. What is Capital Recovery? Capital recovery is the annual payment that would recover the initial investment lost through depreciation, plus interest on the investment. It relates to investment analysis and net present value. The capital recovery amount is usually a little higher than the sum of depreciation and interest because it accounts for the time value of money.

11. Repairs • Annual repair costs will vary with use, machine type, age, preventative maintenance programs, climate, etc. • Machinery repair costs increase over time • Repair costs are highly variable and difficult to estimate without detailed on-farm records.

12. Table 22-2Average Repair Costs per 100 Hours of Use, Percent of New List Price Gives average costs Over entire life. Will Normally be less for Newer machinery, Higher for older Machinery. Source: Hunt, Donnell; see text

13. Fuel and Lubrication • These costs are important for powered machinery. • Fuel use per hour depends on engine size, load, speed, and field conditions. • For tractors: Gallons per hour = 0.060xPTO hp (gas) Gallons per hour = 0.044xPTO hp (diesel) Where PTO = maximum power takeoff horsepower of the tractor

14. Lubricants For powered machinery the costs for lubricants and filters average about 10 to 15% of fuel costs. For non-powered machines, it is generally small enough to ignore.

15. Labor • Amount needed for machinery depends on operation, field speed and efficiency, and the size of machine. • Labor costs are generally estimated separately but need to be included. • Total labor charge should include time spent fueling, lubricating, repairing, adjusting, and moving machinery, not just operating it. These activities can add as much as 10 to 25 % to machinery field time.

16. Custom Hire or Rental • Custom machinery rates usually quoted by acre, hour, bushel or ton, and include labor costs. • A farmer may rent a machine for a few days or weeks. In this case, fuel and labor costs must be added to rental rates.

17. Other Operating Costs Some machines use twine, plastic wraps, or bags. These costs must also be included.

18. Machinery Costs and Use • Annual total ownership or fixed costs are usually assumed to be constant regardless of the level of use. • Operating or variable costs increase with use, generally at a constant rate per acre or hour. • The result is that annual total costs increase at a constant rate and average total costs fall as use increases.

19. Figure 22-1Relations between total and average machinery costs

20. Examples of Machinery Cost Calculations • List the basic data • Calculate ownership costs • Calculate operating costs • Calculate total cost per hour • Calculate cost per acre

21. Table 22-3Calculating Machinery Costs for a New Combine

22. Table 22-4Combined Cost of a Tractor and Implement When a tractor pulls an implement, costs for both must be calculated. Don’t overlook the implements. Do not add ownership costs together because the tractor can be used for other purposes.

23. Factors in Machinery Selection • Machinery size • Timeliness

24. Machinery Size Field capacity = speed (mph) x width (feet) x field efficiency (%) 8.25 A 12-foot-wide windrower operating at 8 mph, with a field efficiency of 82% would have an effective field capacity of 9.54 acres/hour.

25. Field Efficiency Field efficiency is included to recognize that a machine is not always used at full capacity because of work overlap and time spent turning, adjusting, lubricating, and handling. Planting may have field efficiencies as low as 50%. Some tillage operations may have field efficiencies as high as 85 to 90%, particularly in large fields.

26. Minimum Field Capacity Minimum field capacity = acres to cover hours per day x days available Compare this value to the calculated field capacity. Windrower: 180 acres, 2 days, and 10 hours per day = 9.00 acres per hour. Compare to 9.54 calculated. Okay.

27. Field Days Needed Field days needed = acres to cover hours per day x acres completed per hour Operator must decide if typical weather will permit this many days of operation without risk of serious losses.

28. Timeliness Some field operations do not have to be completed within a fixed time period, but the later they are performed, the lower the harvested yield is likely to be.

29. Figure 22-2Hard red winter wheat yields as a function of planting date at Stillwater, Oklahoma

30. Figure 22-3Hypothetical effect of timeliness and machine size on cost

31. Table 22-5Example of a Partial Budget for Selecting the Most Profitable Machine

32. Alternatives for Acquiring Machinery • Ownership • Rental • Leasing • Custom hire

33. Figure 22-4Cost per unit of output for machine ownership versus custom hiring

34. Improving Machinery Efficiency • Machinery investment per crop acre: current value of all machinery divided by total acres • Machinery cost per crop acre: total annual machinery costs divided by total acres

35. Table 22-6Machinery Costs for Iowa Grain Producers (per Crop Acre)

36. Techniques to Improve Efficiency • Maintenance and operations • Machinery use • New versus used machines • Replacement

37. Replace • When machine is worn out • When machine is obsolete • When there are increasing costs • When there is insufficient capacity • To reduce taxes in high profit year • To fit cash flow • For pride and prestige (not a good economic reason)

38. Figure 22-5Estimated annual cost of a 165-horsepower tractor

39. Summary Annual machinery costs are a large part of a farm’s total costs. Selection of optimum machinery size should consider total costs and the effects on timeliness. Machinery efficiency can be improved by proper repairs and maintenance, by owning equipment jointly, or by exchanging the use of individually owned machines.