New equipment math
When does it pay to upgrade? Per-acre cost can tell you, says this rancher and consultant.
You’re hard at work in the field, and all of a sudden, your tractor quits. Maybe a shaft is gone or perhaps a bearing is out. And it’s not the first time, either. Between downtime and repair costs, this tractor is costing you money. On the spot, you decide to sell it and buy a new one.
According to Gordon Williams, events like this are responsible for countless spur-of-the-moment equipment purchases.
“Farmers are acutely aware of the impact of downtime and repair costs,” says Williams, an extension educator and ag consultant. He’s also operated a purebred cattle ranch in Southern Alberta with his brother for the past 35 years. “At times, though, the perception about downtime gets in the way of the true economic cost of owning and operating that new equipment.”
Williams, who consults with farmers on equipment issues, believes that the weak link in many farmers’ equipment analysis is the ability to calculate their equipment cost on a per-acre basis.
Drilling deeper on costs
Williams recommends that producers consider cost in two parts: ownership cost and operating cost. In his view, the impact of both are underestimated by many producers.
“People rent land in order to save on the capital cost of buying that land,” he says, “but when they’re talking about equipment, they don’t look at the capital cost the same way.”
Elements that determine ownership cost include the equipment’s purchase price (including tax), interest, salvage value, annual hours of use, insurance and tax shelter value. The operating costs of equipment can include fuel, lubricants, depreciation, labour and repair factors.
Consider field efficiency
Based on years of crunching farmers’ equipment numbers, Williams believes that operating hours are an analytical blind spot for many.
“It’s important to calculate individual field efficiency,” he says. In other words, out of the total amount of time you’re in the field, how much of it is actually spent on the field operation? “The average seeding efficiency, for example, is about 60 per cent. Between turning corners, moving the equipment and other factors, very often actual seeding hours are much less than people think.”
If that’s the case, you might not be getting as many hours out of the equipment as you estimate, an issue with clear implications for cost analysis.
Williams tells the story of consulting with one producer on equipment costs. After much analysis, he arrived at a figure of $30.20 per acre. Knowing his total annual equipment costs – both ownership and operating, on a per-acre basis – opened up new financial possibilities for this producer. Now, he can objectively assess when it pays to upgrade, and when it’s financially preferable to eat some repair costs or put up with downtime.
“Many of us are good at cost control, but it’s capital operating cost that we generally fail to control,” says Williams. “The name of the game is to understand and control equipment cost per acre to the point where it’s competitive with your neighbours.”
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