Inside Doug Schroeder's machine shed you'll find a lean line of equipment. “We just don't own as much machinery as a conventional farmer does,” says Schroeder, a minimum tiller from McClean County, IL.
Just miles down the road, conventional tiller Kirk Henry keeps a more traditional lineup.
Jack and Gary Appleby, who conventionally till corn and no-till beans, have almost a dozen tractors alone in their machinery mix.
Despite their varied inventories, these Illinois corn and soybean farmers have one thing in common: All report a machinery cost per acre that is well below the $67 statewide average reported by the University of Illinois.
That's no small feat, according to farm management specialists. Cliff Vrieze, farm business management instructor at Minnesota West Community and Technical College, says most farmers do not even know their machinery costs. And many of those who do know find themselves on the high end.
What's high? Experts say to be competitive, your machinery cost per acre needs to be below your statewide average. (See sidebar for how to calculate cost per acre.)
Controlling this expense is more important than ever as input prices continue to rise and profit margins shrink because of low commodity prices. “The cost of machinery continues to rise at a fairly substantial rate,” says Kelvin Leibold, farm management field specialist at Iowa State University. “It is the second largest expense next to land or rent costs. So it is one of those areas you should manage a little closer.”
Gary Schnitkey, farm management specialist at the University of Illinois, agrees: “Machinery costs are one of the few things we see separating more profitable farms from less profitable farms. And less profitable farms tend to have higher machinery costs than other farms.”
Here's the good news. With some effort, it is an expense you can control. How machinery costs can be controlled will vary by farm. And there is no one right way to keep costs in check. But, as Schroeder, Henry and the Applebys show, it can be done.
Schroeder has been keeping track of his machinery costs to stay competitive ever since he can remember. “Someone told me a long time ago, ‘Look across the road,’” Schroeder tells. “‘That guy farms just like you do. You are not going to outwork him. But you better have a plan on how you are going to do it better than he is and how you are going to make money where he isn't.’ Or maybe in today's terms, lose less money than he is losing.”
Schroeder considers no-till part of that plan. He strip-tills corn and no-tills soybeans. Such farming methods let him get by without heavy tillage tools and massive, fuel-gobbling 4-wds to pull them.
He also is able to spread his costs over more than 2,000 acres. Those factors, he says, are the biggest reasons he can keep his machinery cost at $49/acre — $18 less than the statewide average.
Schroeder buys both new and used equipment, depending on what the market bears. For example, he says used semitrailers are in oversupply and are depreciating by as much as 20% a year, making them a great buy for farmers looking for a vehicle that can haul more grain per load than a wagon or tandem truck. This year Schroeder traded his 1980 model for a 1996 for greater reliability. “The truck is virtually new for us for not a lot of money,” he says.
Schroeder is the first to admit he is not a great mechanic. As a result, when he does buy used equipment, he tries to get the manufacturer to throw in a warranty good for at least a season. Having that warranty gives him the confidence to buy used machinery, he says.
Schroeder rolls combines every year to take advantage of manufacturer incentives. But he doesn't trade up. Rather, he has bought the same model and year combine for the past three years, only with lower hours. The reason? “We've always had the concept on the farm that if we can't combine more acres per day, why would we want to get a newer or bigger model?” Schroeder explains. “And lately newer models have come out, but they don't really increase your productivity. So we've been really slow to acquire a newer combine because it just doesn't seem to make lot of sense.”
He says next year it may make more sense to trade for a new one. “I don't think I can find another combine with lower hours than what I already have,” he says. “So I need to figure out what the profitable move is for me with this combine when this fall is over.”
The Applebys farm 2,700 acres in Atwood, IL, and have an extensive machinery lineup to cover them. Yet they are able to keep their machinery cost as low as $57/acre. How? “We're both good at maintaining equipment,” Jack says. Each year after harvest they take apart each machine and look for worn parts and major problems such as cracked engines that could cause breakdowns in the field. “From late November to early February, there is always something in our shop that gets looked at,” Jack says.
During inspections, if they see metal fatigue or ominous cracks in critical places such as frames, they know it is time to trade. They also look at repair bills to determine trade-ins. “We would never spend as much on repairs as a machinery payment would be,” Jack says. “It would be gone long before that.”
Most of the maintenance and repairs they do themselves. They take big items, such as clutches or rear ends, to their local dealer. During the winter months, their dealer lets them come in and help with repairs to cut labor costs.
As a result of their preventive maintenance regime, the Applebys are able to keep their machinery for years without much downtime. For example, they operate two used combines — a 1991 John Deere and a 1990 Case IH — each with 2,000 hrs. on it.
“We don't have to have a new combine every year,” Jack says. “We are perfectly happy with using a combine with some age. It worries some people to death if a machine gets a bit of age on it. But we know what is in there. New paint is nice, but it is not something you can't live without.”
Their last machinery purchase was a 40-ft. Kinze 2600 split-row planter, which they made last year. Before buying, they borrowed the same model for two seasons to make sure it could do a good job planting both soybeans and corn. “We love it,” Jack says. Since the purchase, they have been able to get rid of their 20-ft. soybean drill. “We can cover more ground in a day, which is what we wanted. And it spaces the seed nicely.”
They say their next purchase will be a newer combine.
Kirk Henry's machinery cost is only $49/acre. He attributes his low cost to being a conservative spender.
“I try not to buy something that is not absolutely necessary,” he says. “If it doesn't serve a good purpose, I won't buy it just because it might speed me up a little bit. It's got to help a lot.”
For example, Henry has been considering trading his 1981 corn planter for the last four or five years. But he hasn't because the planter still gets over his 1,400 acres in a timely fashion and results in a good stand. “I won't say it is doing an excellent job, but it is doing the job,” Henry says.
He also doesn't like to finance equipment for longer than a year. “I like to have a very large down payment or maybe all of it before I purchase, or at least have a very good crop in the field,” Henry says. “That way, I know if I go ahead and make that purchase, I can have it paid off pretty quickly.”
When he does buy, he almost always buys used. And he keeps it for a while by following a strict preventive maintenance regime.
He fixes all of his equipment himself with the exception of repairs to engines, transmissions and clutches. As a result, he is able to keep his repair costs down to $11.86/acre on his used lineup, which is lower than the statewide average.
One of the few new machines he ever purchased was a Blumhardt trailer sprayer, which he got this year. “You can't find a good used sprayer,” he says. “And they are a low-cost item, not like a tractor or combine. So I figured I could buy new.”
His next purchase, he says, will be a newer 12-row planter. “It is getting to a point where mine is getting totally worn out,” Henry says. “You can only go so long.”
All three of the farmers we talked to are careful not to oversize equipment. For example, the biggest tractor Henry has is a 190 hp, which he says is just right for his 1,400-acre farm. “If I were to rent another 240 acres, I would step it up another size,” he says.
The farmers also credit much of what they know about tracking, calculating and controlling machinery costs to the Illinois Farm Business Farm Management Association. To find areawide information about farm management associations, contact www.nafbas.org .
John Deere combine (1997)
Two cabbed tractors
1999 DMI field cultivator
Jack and Gary Appleby
John Deere 9600 combine, 2,000 hrs. (1991)
Case IH 1680 combine, 2,000 hrs. (1990)
1975 Steiger 4-wd tractor for heavy tillage work
875 Versatile 4-wd tractor (1979)
7210 Case IH tractor to pull planter
1086 (1977) tractor to pull cultivator and wagons
Seven tractors with less than 100 hp to run augers and mowers
Kinze 2600 split-row planter, 40 ft.
16-row cultivator for corn
Case IH 1660 combine (1992)
Blumhardt trailer sprayer (2001)
Case IH 7140 MFWD tractor (1991)
Case IH 7120 tractor (1989)
IH 1486 utility tractor (1978)
Three 2-ton grain trucks (1960 and 1970 models)
John Deere 750 drill (1996)
Case IH 4300 field cultivator (1998)
IH 12- to 30-row cultivator
M&W Earthmaster chisel plow (1991)
IH 490 disk (1978)
IH 800 12-row planter (1981)
Is your machinery breaking you?
Good machinery managers know their machinery costs and compare them to a benchmark, such as a statewide average. Figure your costs using one of the following calculations.
- Machinery cost per acre:
Total machinery costs ÷ Number of crop A = Machinery cost/A
This is the calculation used most by farm management specialists. To use this formula, you'll need to determine what items to include under “machinery costs.” Definitions vary. For example, Iowa State University defines costs as the DIRTI 5 (depreciation, interest, repairs, taxes and insurance). Cliff Vrieze at Minnesota West Community and Technical College defines costs this way: machinery depreciation, interest on machinery, repairs, insurance on machinery, fuel, custom hire, machinery lease and storage structures (optional). Illinois' Farm Business Farm Management Association includes machinery repairs, machinery hire, fuel, utilities, light vehicles and depreciation on machinery. Each method will provide a different estimate of machinery costs, but all will work. It is important that you use the same method every year so that you have a fair comparison.
Of those costs, depreciation can be the most difficult to calculate and the most often overlooked. There are different ways to calculate it. These include tax depreciation, management depreciation or change in market value. Opportunity cost is sometimes used as a substitute value. Erlin Weness, farm management specialist at the University of Minnesota, says the best way to assess that value is to do a market appraisal each year so that you know how much an item has actually declined in value.
Once you calculate your cost per acre, compare it to the statewide average. For example, the 2000 average for an 800- to 1,200-acre corn and soybean farm in Illinois was $67/acre, according to Gary Schnitkey, farm management specialist at the University of Illinois. He says these averages would apply to any state in the Midwest as indicators.
To be competitive, your cost per acre needs to be below the average, the specialists say. Weness says the good machinery managers are in the $50 to $55/acre range.
Kelvin Leibold, farm management field specialist at Iowa State University, says you may want to go even lower than that. “I would throw out as a goal to get to $45/acre because more than that and it becomes competitive with custom farming,” Leibold says.
- Machinery investment per acre:
Fair market value of machinery ÷ Tillable A = Machinery investment/A
This figure ranges from $150 up to $500/acre, with an average being about $300/acre, according to Minnesota's Weness. “So compare yourself on that spectrum,” he says. However, if you find that your machinery investment is above average, don't automatically assume you are overequipped. There may be other factors such as lower repair bills, lower labor costs and less downtime that balance out your total costs.
- Cost of production per bushel:
Variable and fixed costs ÷ Number of bu. = Cost of production/bu.
Jess Lowenberg-Deboer, ag economist at Purdue University, says this figure is sometimes the most accurate indicator of machinery costs. He states that your variable costs of production should be somewhere around $1 on corn and around $2 on soybeans. After you calculate your variable costs, add in land, equipment costs and cost for the farmer. “The key thing is, you should be able to produce corn or soybeans for the loan rate,” Lowenberg-Deboer says. “If you can't do that, then you may have the lowest equipment costs in the world, but you are still not going to stay in business.”