Are you equipped for profit? Machinery decisions are among your most complex management problems, and mistakes could cost you thousands of dollars annually.
Start by identifying your main reasons for replacing equipment, says William Edwards, Iowa State University ag economist. Consider reliability, capacity, long-run costs, obsolescence and tax consequences.
For Don Sperr, a west-central Minnesota cash grain farmer, it's all about assuring reliability and minimizing manpower.
Sperr, 46, raises corn and soybeans in Stevens County with the help of one full-time employee and his son, a college student. Sperr also employs several part-time harvest workers. His machinery values average $250/acre. “You can farm with less capital investment,” he says, “but then it's difficult to find help during planting and harvesting.”
Sperr owns most of his farm equipment and replaces key implements frequently. He also leases one major piece of equipment and shares some machinery. Among his strategies, Sperr owns large-capacity planting and harvesting equipment, trading at scheduled intervals for maximum reliability; shares harvest equipment with a neighbor and his father-in-law; leases a tillage tractor to preserve working capital and gain tax advantages; holds less-critical machinery for a long time to reduce long-run costs; and keeps machinery debt low.
One of the most important management decisions is matching equipment size to acreage, says Edwards, the Iowa economist. A 2006 University of Illinois report shows a 20% drop in owning and operating a 340-hp. combine when you farm 3,000 acres vs. 2,000 acres (from $28.70/corn acre for 2,000 acres to $22.60/corn acre for 3,000 acres).
Grain farmers should have enough equipment to complete tillage and planting in 20-25 working days under normal conditions, and enough harvesting equipment to finish in 25-30 working days, or “a little less time in the northern Corn Belt,” Edwards says.
In 2006, Sperr seeded his crop in about 16 working days, using a JD 1790 split-row planter, and logged 800 hours on his JD 8420 tractor for the season. He owns John Deere's largest combine, a JD 9860, putting on 300 separator hours a season.
To lower the risk of breakdowns and costly repairs, Sperr trades his planter and other key equipment after four or five years, and sometimes more often. This winter, he replaced his 16-row planter and his 8420 tractor — both four years old. “I'm going to be planting more corn in 2007. So I traded for a 24-row, 30-in. JD 1770 planter and JD 8430 tractor.”
In recent years, Sperr has been upgrading his harvest equipment annually. “I've been able to trade for a new combine for $90 per separator hour, which works out to $6 per acre to boot.” During the 2006 harvest, he averaged 15 acres/hour, using a 35-ft. flexhead and a 12-row, 30-in. corn head. His Geringhoff chopping corn head eliminates an extra pass for stalk chopping, another labor savings.
Many farmers replace machinery on a scheduled basis — commonly every five to 10 years, says Del Pepple, a farm business management instructor in central Minnesota. “These are generally farmers of intermediate size who don't have extra time to do repairs.”
An Iowa State University report shows annual after-tax costs for a new 180-hp. tractor leveling off around year six and climbing after year eight, suggesting a good time to trade.
Still, annual machinery costs typically rise slowly, Edwards says. That's why Sperr hangs on to a 16-year-old tractor with 8,500 hours, keeping it for jobs where timeliness is not an issue, like picking rocks and moving snow.
Since 2003, expense method depreciation Section 179 has offered attractive tax advantages for buying farm machinery, “and we've seen a lot of purchases,” says Dennis Sleiter. He is branch manager at Ag Country Farm Credit Services, which serves southeastern North Dakota and west-central Minnesota. Section 179 allows farmers to expense up to $108,000 of qualified equipment purchases on their 2006 federal tax returns and $112,000 in 2007.
Equipment leasing and sharing are becoming more common, Sleiter says. Sperr, for example, leases a 500-hp. Cat tillage tractor, logging 800 hours a year on it. The five-year operating lease includes a buy-out option at the end, for an agreed-on value. The lease payments are fully tax-deductible as ordinary operating expense.
Leasing the tractor helps with tax planning and puts less demand on his cash flow, says Sperr, who likes to maintain his working capital at $100/acre.
In 2005, Sperr considered renting a second combine. But when he ran the numbers, he decided he wouldn't get full value out of the minimum rental fee. Instead, he and a neighboring hog producer worked together. Sperr's hired man “ran their combine and we did all their beans and all my beans. We combined 3,500 acres together and it worked really well. We kept our trucks, tractor and cart together for the whole harvest and it was a lot more efficient.” They did the same thing in 2006, “and it worked great.”
Sperr and his father-in-law, who farms near Jamestown, ND, share trucks at harvest. “We take our semi-trucks out there for his wheat harvest. When he's done with his soybeans, he brings his truck here for our corn harvest.”
“How and when equipment is replaced can mean a difference of thousands of dollars annually,” Edwards says.“Machinery accounts for more variation in profitability than even seed or fertilizer.”
Online Decision Tools
Iowa State University's Ag Decision Maker Web site includes eight spreadsheet decision tools to help growers estimate annual farm machinery costs, machinery capacity, field days, leasing vs. buying and more. www.extension.iastate.edu/agdm.
The University of Illinois' Farmdoc Web site includes detailed machinery operating cost estimates and Excel spreadsheets to estimate the chance of completing field operations in a certain number of days with particular machinery; costs of tillage, planting and combining and machinery financing options. www.farmdoc.uiuc.edu/manage/machinebuilding_index.html.
To compare your farm's performance to a wide array of financial and production information benchmarks, go to: www.finbin.umn.edu.