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Can you justify it? A look at managing machinery costs

John Molenhuis for Progressive Dairy Published on 13 June 2022

Machinery is expensive. When making decisions to invest in equipment, it is important, then, to be sure it pays. Being able to cash flow a new equipment purchase is different than being able to justify a new purchase.

What you can afford to buy can be different than what you can justify based on your farm size and the amount the equipment will be used.

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One of the fundamental rules of machinery ownership is to “use it.” In other words, be sure you are using the equipment to its full capacity to spread the fixed ownership costs. Machinery left idle costs you money.

There is variation among how dairy farms handle machinery operations and investment. Most will be growing their own forages and grain but will differ in how they get the field work done – doing it themselves or hiring custom operators.

The 2020 Ontario Dairy Farm Accounting Project coordinated by Dairy Farmers of Ontario reports dairy financial results in bottom, middle and high groups based on their cost of production per hectolitre. This allows you to compare your results across these three groups. The bottom farms are the highest-cost producers and the top the lowest.

Machinery costs can be separated into two main categories:

1. Operational: fuel, repairs, labour, custom work

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2. Ownership: depreciation, interest, insurance and housing

Tracking them and benchmarking against others can help in machinery decisions.

Table 1 presents several of the key machinery costs where we see differences across the groups.

Selected machinery expenses per cow

Top farms spent one-third less on fuel and repair costs. However, they relied more on custom work in cropping expenses, spending more than double per cow compared with the bottom farms. This may suggest they are using custom operators to their advantage, allowing them to focus their labour and capital on more dairy-related tasks.

During a session at last year’s North American Manure Expo, a panel of custom operators and farmers discussed the decision of owning or hiring for manure application. The dairy farmer on the panel indicated the decision to custom hire was not only about cost but about labour availability and use. Their decision to hire custom applicators freed up their labour for other areas of the farm.

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The bottom farms’ machinery investment was $10,248 per cow, representing the market value of their machinery divided by the number of cows. This investment was 1.5 times higher than the top farms. The lower investment in machinery for the top farms translated into lower depreciation and interest costs.

A lot goes into making the decision whether to own, lease or rent equipment, or to do the work in-house or hire a custom operator, and there is more than one approach to manage machinery costs. Right-sizing your equipment, effective replacement strategies, balancing economics and timeliness of operations can all pay dividends in machinery cost control.

The financial cost numbers are, of course, important – but other considerations will factor into the decision and can include:

  • Labour availability. Do you have labour to operate the machinery?

  • Annual use. How many hours and how often do you need it?

  • Mechanically inclined. Do you or can someone in your operation repair and maintain equipment?

  • Cash flow. Is cash flow a consideration when considering one option over another?

  • Access to custom operators. Are there reliable custom operators in your area?

  • Rental equipment. Are there local equipment retailers or farms that have rental equipment available for short periods when you need it?

  • Technology. Is access to the latest technology a priority for your operation?

  • Capital. Would custom hiring, leasing or renting equipment free up capital to be invested elsewhere in the operation?

With your year-end financial statements in hand, take some time to review the machinery-related costs and compare your results to the cost of production data. If you are significantly out of line, looking at your machinery investment per cow can be a place to start to indicate how capitalized you are in machinery compared to others.

Machinery decisions are never as simple as calculating the numbers; other things factor into the decision. But even those non-quantitative factors will filter down and impact your finances in some way. Remember the afford-versus-justify consideration in your machinery management decisions.

To help work through the process, consider the machinery costing tools available through provincial agriculture departments and U.S. agriculture extension services. end mark

References omitted but are available upon request. Click here to email an editor.

John Molenhuis
  • John Molenhuis

  • Business Analysis and Cost of Production Specialist
  • Ontario Ministry of Agriculture, Food and Rural Affairs
  • Email John Molenhuis

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