Penciling out equipment costs

This is no place to get emotional or caught up in what one well-known U.S. economist calls the 'Equipment Hormonal Response' that triggers the impulse to buy something new. Machinery has to earn its keep.

Posted: January 30, 2006

New or used equipment or hiring a custom spraying service - what makes the most economic sense for farmers today?

That $250,000 high-clearance, self-propelled, 1,000 gallon-capacity sprayer with a 100 foot boom would sure look good in the yard and would be spraying about 3,000 acres of grains and oilseeds this summer. But can you justify the costs?

With conservative estimates, ownership of that unit over 10 years amounts to about $900 per spraying hour, or about $10.50 per acre. It's impossible to rationalize that cost, says Dale Robinson an Alberta farm business management specialist with Alberta's Ag-Info Centre based in the central Alberta community of Stettler. That's the kind of reality check producers need to make before they act on any major capital machinery purchase, says Robinson.

Aside from a convenience factor and a couple other intangibles, producers need to look at what their farming operations really can afford, says Robinson.

No wiggle room

"Maybe 15 or 20 years ago, there was a little extra money in the cropping operation that would allow someone to buy a piece of equipment they couldn't justify, but the farm could afford to carry it," says Robinson. "But margins are so tight today, there's no room for extras. It has to make economic sense."

Considering that today's high capacity seeding, spraying and harvesting equipment can handle the entire cropping operation for about $50 per acre on a custom basis, it's difficult to justify owning and maintaining a lineup of iron that might cost $75 or more per acre.

Any sprayer purchase has to hold up against the least-cost alternative for applying pesticides, says Robinson. "When you consider that in most parts of Alberta, you can hire a custom applicator for about $4.50 per acre (and closer to $3 per acre, according to Saskatchewan's custom rate guide) you have to compare whether owning your own system makes more sense than hiring it done," says Robinson.

Several factors

The decision involves more factors than just the capital cost of dollars and cents, he adds. There's the convenience factor, the expected availability of custom applicators, the quality of work done and whether more-timely application, for example, could preserve the quality and market value of the crops.

"If it costs a farmer $5 per acre to apply herbicide with his own equipment, that may be well worth it if it improves the value of the crop," says Robinson. "If it makes the difference between producing food-quality peas versus feed peas, for example, that has to be factored in."

While buying new, or even late-model used equipment is tempting, producers need to keep the economies of scale in mind, he says. "With most of the higher capacity machinery today, the general rule is, you need between 3,000 and 5,000 acres to justify the capital cost of machinery. Three thousand acres would be the minimum, and 5,000 is better."

As the farm operation scales up, 7,500 acres is an awkward size, because it's too big for one machine, but not quite big enough for two. The farm needs 10,000 acres to be at optimum efficiency.

Run the numbers

Machinery calculators are available on various Web sites to help producers run through the what-if scenarios, says Robinson. Alberta Agriculture offers a good calculator on it's Ropin the Web Internet site at: http://www.agric.gov.ab.ca/app24/costcalculators/ machinery/getmachimpls.jsp

For example:

• Based on a new $225,000 self-propelled sprayer, using the machine for 100 hours per year, the producer would need to crop about 6,500 acres to keep the cost in the $4.40 per acre range. The same unit could cover a 13,000-acre farm, with 200 hours of use per year, at a cost of about $2.41 per acre.
• A good, used, self-propelled machine valued at $140,000, on a 5,000-acre farm would cost about $3.73 per acre.
• For a smaller operation with 2,000 acres a new pull-type sprayer valued at about $27,000 (including tractor and operator) could handle pesticide application for about $2.52 per acre. And a used machine at $19,000 could do the job for just over $2 per acre.

"A producer has no control over the weather, may not have much choice on the overall cost of inputs, and in some cases doesn't have much room on the marketing side," says Robinson. "So the only real opportunity for cost reduction is in land ownership and machinery costs. If producers want to survive in the crop business today, there's little room for guessing. If they don't figure in a profit in the first plans, the operation is in trouble."