Chapter 22

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					Farm Management
     Chapter 22
Machinery Management
                  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
Ownership Costs    Operating Costs
•   Depreciation   • Repairs
•   Interest       • Fuel and lubrication
•   Taxes          • Labor
•   Insurance      • Custom hire or
•   Housing          rental
•   Leasing        • Other operating
                     costs

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                  Capital Recovery
Capital recovery =
[amortization factor x (beginning value – salvage value)]

         +    (interest rate x salvage value)




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                          Table 22-1
                  Estimated Salvage Value as
                  Percentage of New List Price
          Age of
         machine        Tractor     Tractor
         in years      80-149 HP   150 + HP   Combine   Baler   Tillage   Planter

             1            68%        67%        70%      56%      61%      65%
             2            62         59         59       50       54       60
             3            57         54         51       46       49       56
             4            53         49         45       42       45       53
             5            49         45         40       39       42       50
             6            46         42         36       37       39       48
             7            44         39         32       34       36       46
             8            41         36         29       32       34       44
             9            39         34         26       30       31       42
            10            37         32         22       28       30       40
            11            35         30         21       27       28       39
            12            34         28         18       25       26       38
       Assumed hours
       of annual use     400         400        275       _        _         _


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                    Source: ASAE Standards, 2001                                    6
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                   Table 22-2
   Average Repair Costs per 100 Hours of Use,
           Percent of New List Price
                  Machine                            Percent of list price %

                  Two-wheel-drive tractor                     0.83
                  Four-wheel-drive tractor                    0.50
                  Moldboard plow                              5.00
                  Tandem disk                                 3.00
                  Chisel plow                                 3.75
                  Rotary tiller                               5.33
                  Field cultivator                            3.50
                  Rotary hoe                                  3.00
                  Row crop cultivator                         4.00
                  Planter, grain drill                        5.00
                  Mower, bar                                  7.50
                  Mower, rotary                               8.75
                  Mower-conditioner                           3.20
                  Windrower, self-propelled                   1.83
                  Rake                                        2.40
                  Square baler                                4.00
                  Round baler                                 6.00
                  Forage harvester, pull type                 2.60
                  Forage harvester, self-propelled            1.25
                  Cotton picker, self propelled               2.67
                  Sugar beet harvester                        6.67
                  Combine, self-propelled                     1.33
                  Grain wagon                                 2.67
                  Forage wagon                                2.50
                  Boom sprayer                                4.67
                  Orchard sprayer                             3.00
                  Fertilizer spreader                         6.67
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chapter 22        Source: Hunt, Donnell; see text
                          Figure 22-1
                  Relations 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 22-3
       Calculating Machinery Costs for a New
                      Combine
                  Step 1: List basic data
                  New combine, 24-foot header, 240-hp diesel engine:
                    List price                                                                        $175,000
                    Purchase cost                                                                     $160,000
                    Salvage value (22% of new list price, Table 22-1)                                  $38,500
                    Average value ($160,000 + 38,500) ÷ 2                                              $99,250
                    Ownership life                                                                    10 years
                     Estimated annual use                                                             300 hours
                     Interest rate                                                                          8%
                  Step 2: Calculate ownership costs
                  Depreciation ($160,000 - 38,500) ÷ 10 years                                          $12,150
                  Interest ( 8% × $99,250)                                                              $7,940
                  Taxes, insurance and housing (1.5% × $99,250)                                         $1,489
                      Total annual ownership costs                                                     $21,579
                  Ownership costs per hour ($21,579 ÷ 300 hours)                                        $71.93
                  Step 3: Calculate operating costs
                  Repairs (1.33% × $175,000 list price × 300 hours ÷ 100)                               $6,983
                  Diesel fuel (240 horsepower × 0.044 gallon/hp-hour × $0.85 per gallon × 300 hours     $2,693
                  Lubrication and filters (15% of fuel costs)                                             $404
                  Labor (300 hours x $9.00 per hour × 1.20)*                                            $3,240
                     Total annual operating costs                                                      $13,320
                  Operating cost per hour ($13,320 ÷ 300 hours)                                         $44.40
                  Step 4: Calculate total cost per hour
                  Ownership cost per hour                                                               $71.93
                  Operating cost per hour                                                               $44.40
                    Total cost per hour                                                                $116.33
                  Step 5: Calculate cost per acre
                  Performance rate: 8 acres per hour ($116.33 ÷ 8 acres)                                $14.54

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                 Table 22-4
   Combined Cost of a Tractor and Implement
                                        185-hp             16-ft chisel
                                        tractor                   plow

       Annual ownership costs           $8,500                   $930
       Annual hours of use                 500                    100
       Ownership cost per hour          $17.00                  $9.30
       Operating cost per hour:
        Fuel and lubrication              7.95
        Repairs                           5.12                    2.58
        Labor                             7.00
       Total cost per hour              $37.07                 $11.88
       Combined cost per hour                     $48.95
       Field capacity, acres per hour                 12
       Combined cost per acre                      $4.08




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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




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          Minimum Field Capacity

                  Minimum field capacity =

                     acres to cover
              hours per day x days available




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                  Field Days Needed

      Field days needed =

                acres to cover
   hours per day x acres completed per hour




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                       Table 22-5
   Example of a Partial Budget for Selecting the Most
                  Profitable Machine
             Adjustment: Change from a 20-foot grain drill ($15,000 purchase) to a 40-foot drill ($30,000 purchase).
             Assumes a 44% salvage value, 8-year ownership, 10% interest rate. The 20-foot machine requires
             137 hours to drill 1,000 acres, the 40-foot machine requires 65 hours.
             Additional Revenue:
             1 bushel per acre increase in yield x 1,000 acres x $3.75 per bushel
             Total additional revenue                                                                         $3,750
             Reduced costs:                                         Ownership        Operating
             Depreciation                                             $1,050
             Interest                                                  1,080
             Taxes and insurance                                        108
             Repairs                                                                    $1,028
             Labor                                                                       504
             Subtotal                                                 $2,238            $1,532
             Total reduced costs                                                                              $3,770
             Total of additional revenue and reduced costs                                                    $7,520
             Additional costs:                                      Ownership        Operating
             Depreciation                                             $2,100
             Interest                                                  2,160
             Taxes and insurance                                        216
             Repairs                                                                     $975
             Subtotal                                                 $4,476             $975
             Total additional costs                                                                           $5,451
             Reduced revenue:                                                                                          0
             Total additional costs and reduced revenue                                                       $5,451
             Net change in farm income                                                                        $2,069


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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 22-2
  Hard red winter wheat yields as a function of
     planting date at Stillwater, Oklahoma




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                       Figure 22-3
             Hypothetical effect of timeliness
                and machine size on cost




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         Alternatives for Acquiring
                Machinery
•   Ownership
•   Rental
•   Leasing
•   Custom hire



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                   Figure 22-4
 Cost 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 22-6
    Machinery Costs for Iowa Grain Producers
                (per Crop Acre)


                             High-profit   Low-profit
                                third        third

      Total machinery cost      $54           $63
      Machinery investment      $228         $245




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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 22-5
   Estimated annual cost of a 165-horsepower
                    tractor




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                   Summary
       Annual machinery costs are a large
       part of a farm’s 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.
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