Maximize your margin by minimizing fixed machinery costs

COLUMBIA, Mo. – Major equipment purchases involve more ongoing costs than many realize. Whether you’re making a cash purchase or opting for financing, the ownership costs of machinery continue after the check is cashed or the final payment is made.

Fuel, maintenance and labor too often they are used as a proxy for total machinery cost when planning for the breakeven price of the crop being grown. While these costs are easily measurable, they may represent less 60% or less of total expenses over the useful life of a machine. The “DIRTI 5” – depreciation, interest, repair, taxes and insurance – are harder to identify and allocate to each machine on a per-acre or per-year basis.

MU Extension senior agribusiness research analyst Drew Kientzy led the development of a new publication, Managing Farm Equipment Ownership Costs, which is available for free download. The publication highlights how to calculate the DIRTI 5 components, how they interact with one another and strategies for minimizing these costs.

“The two universal factors in the per-acre, per-bale, per-bushel or any other unit cost of machinery are the value of your equipment and how much it is used,” Kientzy said. He notes that there are two surefire ways to bring fixed machinery costs down: “Minimizing the total value of machinery without having a significant impact on productivity, and sizing your equipment to fully utilize its capabilities throughout the working season.”

Another consideration is whether to own, lease or hire out machine work. There is usually no single correct answer for all machines on the farm. For instance, a farm may want to own trucks, tillage tools, planting equipment and harvest equipment. Trucks and tillage equipment don’t get regular technological advancements, and major repairs can be made either on the farm or in an independent shop.

From a technology or repair mitigation standpoint, planters and harvest equipment may need to be updated more often, but owning these assets gives farms the flexibility to modify the machines to their preferences and conditions and ensures that the machine will be dedicated to a timely planting and harvest on their farm.

Tractors and sprayers are more frequently leased since they get used for a large portion of the year, and leasing offers a cost-effective way to stay up to date on the latest technology. Some of the most common custom hire jobs include fertilizer application and spraying. Both require significant investment in support equipment, and the products applied can be harsh on machinery. Because of this, farms tend to take one of two approaches: Some choose to own the equipment and make the most of it by offering custom services to nearby farms, helping spread out the cost by utilizing their machinery to its full capacity. Others prefer to hire these services instead, paying a set fee per acre to avoid the expense of owning underutilized equipment.

Rates for custom farm services are an easy way to find estimates to benchmark the machine costs on your operation. MU Extension’s Custom Rates for Farm Services in Missouri is available for free download.