University of Minnesota

Dairy Initiatives

Dairy

Department of Animal Science


D A I R Y   I n i t i a t i v e s   N E W S L E T T E R
V o l u m e   1 1       I s s u e   2      S u m m e r   2 0 0 2


Tips for Trimming Machinery Costs

WILLIAM LAZARUS
Department of Applied Economics
University of Minnesota

Have you noticed how much of your money goes into machinery? Research has shown that up to 60 percent of the cost of making corn silage and haylage is machinery-related. You can do a lot to improve your profitability simply by keeping machinery costs under control.

What Does It Cost?
The first step in controlling machinery costs is to know what they are. You probably have a good idea about what a piece of machinery costs to buy. But that's just part of the picture. There are also use-related costs (fuel, lubrication, labor, use-related repairs, etc.) and time-related costs (interest, insurance, housing, etc.).

University of Minnesota Extension Service publication Minnesota Farm Machinery Economic Cost Estimates (FO-6696) can help you estimate the true cost of owning and operating various types of machinery. You can download the publication from:

www.apec.umn.edu/faculty/wlazarus/machinery.html

The information it provides is useful for answering questions that can help you save on machinery costs, such as:

  • "How can I estimate the cost of operating my equipment for use in my crop planning budgets?"
  • "Should I purchase new equipment to replace a piece that is wearing out, or hire a custom operator instead?"
  • "What's a fair arrangement that a tenant and landlord can use to share the costs of new feeding or manure-handling equipment?"
Repair or Replace?
An important way you can save on machinery costs is to make smart choices as to whether to repair or replace an aging piece of machinery. You might think repair is cheaper because you don't have to drop a lot of dollars all at once. But at some point the time and expense involved in fixing an old machine is more than it's worth. How do you figure out what that point is?

The approach I use is to compare the cost of operating the current machine one more year with the cost of operating a replacement machine for an "average" year. If the current machine has some age on it, it will likely have higher repair costs than the replacement would. However, the overhead costs will probably be lower than they would be for the new machine because it has already been mostly depreciated out.

To make the comparison, first estimate the cost of operating the existing machine one more year. Look back at records of past repairs. Then look at the machine, decide what repairs it's likely to need in the next year, and estimate what the cost of those might be.

The second step is to calculate the cost of operating a replacement machine for an "average" year. A spreadsheet template is available for purchase. Contact the author at 612-625-8150 or wlazarus@umn.edu.

As an example, say you are thinking of replacing your forage harvester with a $38,300 pull-type forage harvester with a three-row corn head and a windrow head, expected to be used on 100 acres of corn silage and for two cuttings of haylage from 200 acres of alfalfa. Using the spreadsheet, you can determine that for a typical situation, total costs for the forage harvester plus a 160-horsepower tractor and an operator's wages work out to be $47/acre for the corn silage and $20/cutting/acre for the haylage. This means it would pay to trade the current harvester if you figure repairs and other costs of using it another year (including yield losses due to time lost in more frequent breakdowns) will be more than those amounts.

The replacement decision gets more complicated if technology changes make the replacement machine more productive than the current one. For example, if a kernel processor for a forage harvester improves digestibility of corn silage, you need to factor the benefit of that improved digestibility into the decision. At 18 tons/acre, the $47/acre cost of harvesting corn silage mentioned above works out to be $2.59/ton. The addition of a $6,000 kernel processor would increase that cost to $2.99/ton. The 40¢/ton increase can be compared to the digestibility benefits expected.

The Value of Sharing
In the 1950s, farmers often traded work with friends and neighbors. As equipment gets larger and more expensive, the concept of trading work may be coming back. I've been hearing more reports in the past few years about producers purchasing equipment jointly or using custom operators so they don't have to bear the costs of a big piece of machinery by themselves.

When you share machinery, in effect you are splitting the time-related expenses (insurance, housing, etc.) Because you fit more use into a year, the time-related expenses are less per hour of use. Of course, using the machine over more acres each year probably means trading it sooner than otherwise, but you will still probably come out ahead.

You can figure out how much further ahead using the spreadsheet template. Table 1 shows the results when the template is applied to the use of a baler for the large rectangular bales that are sometimes used where hay is shipped long distances.

The top part of Table 1 shows how increasing annual use by sharing shortens the expected trade-in age, if traded at a given number of hours. For example, if the baler covered 16 acres/hour and the farm had 815 acres to harvest each year (three cuttings x 272 acres/cutting), annual usage would be 50 hours. If traded at 600 hours, a baler used 50 hours/year would be traded at 12 years. If usage is increased to 100 hours/year, the 600 hours would be up after only 6 years.

The bottom part of Table 1 shows how the increased usage would affect the total cost per acre to own and operate the baler. (The costs shown are for the baler only, not including the tractor or operator labor.) The cost per acre drops as the annual use increases. The actual differences are probably less than this because the formulas used by the spreadsheet template to estimate trade-in values don't factor in wear and tear for most implements. Nevertheless, there is still likely a benefit to sharing expensive implements that you use for a relatively small amount of time.


TABLE 1. Impact of Annual Usage on Trade-in Age and Cost Per Acre to Own and Operate a Large Rectangular Baler


aTractor, fuel, and labor costs would add $2.31/acre to the amounts shown.

For more information on sharing farm machinery, please see Sharing Farm Machinery by Erlin Weness, Extension Educator Farm Management.


 

D A I R Y    I n i t i a t i v e s    N E W S L E T T E R
Volume 11    Issue 2    Summer 2002