Farm Management

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Farm Management

• Chapter 22
• Machinery Management

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Chapter Outline

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

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Chapter Objectives

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

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Estimating Machinery Costs
Operating Costs
Ownership Costs

• Depreciation
• Interest
• Taxes
• Insurance
• Housing
• Leasing

• Repairs
• Fuel and lubrication
• Labor
• Custom hire or rental
• Other operating costs

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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

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

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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
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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

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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.
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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.

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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.

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

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Figure 22-1Relations between total and average
machinery costs
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Examples of Machinery Cost Calculations

1. List the basic data
2. Calculate ownership costs
3. Calculate operating costs
4. Calculate total cost per hour
5. Calculate cost per acre

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Table 22-3Calculating Machinery Costs for a New
Combine
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Table 22-4Combined Cost of a Tractor and
Implement
When a tractor pulls an implement, costs for both
must be calculated. Dont overlook the
implements. Do not add ownership costs
together because the tractor can be used for
other purposes.
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Factors in Machinery Selection

• Machinery size
• Timeliness

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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.
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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.
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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.
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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.
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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.
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Figure 22-2Hard red winter wheat yields as a
function of planting date at Stillwater, Oklahoma
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Figure 22-3Hypothetical effect of timeliness
and machine size on cost
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Table 22-5Example of a Partial Budget for
Selecting the Most Profitable Machine
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Alternatives for Acquiring Machinery

• Ownership
• Rental
• Leasing
• Custom hire

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

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Table 22-6Machinery Costs for Iowa Grain
Producers (per Crop Acre)
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Techniques to Improve Efficiency

• Maintenance and operations
• Machinery use
• New versus used machines
• Replacement

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Replace

1. When machine is worn out
2. When machine is obsolete
3. When there are increasing costs
4. When there is insufficient capacity
5. To reduce taxes in high profit year
6. To fit cash flow
7. For pride and prestige (not a good economic
   reason)

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Figure 22-5Estimated annual cost of a
165-horsepower tractor
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Summary
Annual machinery costs are a large part of a
farms 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.