Estimating the cost and return of farm enterprisesWritten by Christy Hemken
Compiled in 1993, the bulletin provides a basis to estimate machinery costs and outlines how to do that for one’s own operation. In addition, there is now software that will help an operator accomplish the same thing.
“With machinery costs, there are two categories we’re worried about – ownership, or fixed costs that remain constant and variable, or operating costs that increase the more you use the machinery. The two of those together make the total cost,” said Hewlett.
Averages dictate that machinery and the labor to run the machine total 30 percent of the costs on a farm in the Big Horn Basin. “Machinery costs are high, and we can’t take them away. They have a direct impact on the bottom line, and if we can better manage them we can help increase our dollars of return,” noted Hewlett. “It’s not unusual that 30 to 50 percent of an operation’s costs are made up by machinery and related services in a typical farm situation.”
Fixed costs on machinery include taxes, housing, insurance and depreciation. “Housing is important. If you keep equipment shedded it won’t wear out as fast and have as high of repair bills,” he explained. “You’ll either have that cost in repairs or in housing.
He mentions insurance against theft, fire or vandalism and depreciation due to wear, age and obsolescence. “Depreciation is the sense of management,” he stated. “You need to allocate the initial cost of the machine over its useful life, or how long you’d expect a $100,000 tractor to last. You can’t assign that cost to one crop next year, but you need to allocate some of that initial crop and each crop you produce.”
Fixed costs also include long-term interest. “You need to charge yourself for the capital tied up in that machine after purchase, whether you purchased it with your own funds or borrowed. Either way there’s an interest charge associated with that machine and it ought to be returning some sort of rate of return.”
Hewlett said the variable costs are the ones that get noticed most often. “Many of your fixed costs are non-cash, but you’ve got to pay the variable costs on a regular basis, including fuel and maintenance.”
Fuel and lubrication includes fuel, obviously, as well as grease, oil, hydraulic fluids the labor that goes into fueling and lubricating the machine. Repair and maintenance include all costs to keep the machine in working condition, including parts, welding and other services, as well as the labor that makes it happen. “That includes not only off-farm costs, but what we’re doing on-farm with our own labor and parts,” said Hewlett. “That needs to be accounted for.”
Another variable cost is the labor to operate the machine, whether that be day labor, hired labor or owner labor. “There needs to be an hourly charge for someone to sit on the tractor and make it go down the row,” instructed Hewlett.
UW’s machinery costs bulletin goes down through each cost, describing it and giving the method for calculating it. The results are given on either an annual basis or per hour for a number of different machines and implements.
“We’ve provided some background to allow operators to see if the tables match up with their equipment. Typically people don’t have the list price, and if it’s older equipment that you’re not quite sure of the value, the table gives you an estimate of list prices,” said Hewlett. UW came up with those figures through a survey of machinery dealers around Wyoming.
Hewlett said the university has again collected similar data to update the bulletin. “But even brand new data needs to be reflective of your situation. The best data is your own information if you can come up with it.”
Why go to all the trouble of figuring out exactly what it costs to operate your machinery? Hewlett said the data is helpful in estimating the cost and return of various enterprises. “Accurately estimating the machinery cost is an important piece of estimating the total cost of an enterprise,” he said. “Then you can calculate various break even points.”
He said one scenario when this is extremely helpful is setting custom rates. “If you do any custom work, having the ability to calculate the cost of operating your machinery is a whole lot better than looking it up in a custom rates guide, because that’s just a survey of operators and can vary greatly. You’ve got to calculate the rate for your particular situation.”