# Profitability vs. Machinery Costs



## Vol (Jul 5, 2009)

Direct correlation. This is a great read.

Regards, Mike

http://www.agweb.com/farmjournal/article/keeping_machinery_costs_in_check/


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## swmnhay (Jun 13, 2008)

Interesting.I'm well under $100 machinery costs per acre.


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## NDVA HAYMAN (Nov 24, 2009)

_I am also way below the $100 price per acre but I pay for my equipment up front. Don't know how that would correspond if I had to make payments. Being under $100 might mean that I can buy a new tractor?














or at least convince myself that I should? Naw. I'll just keep my old stuff._


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## slowzuki (Mar 8, 2011)

When you pay up front you still have your machinery repair expenses, your depreciation and often in a business plan the "cost" of tying up capital ie what you could be saving on other debt or what that money would be making invested. The "cost" of capital I'm not too keen on calling that an expense except I agree with putting cash into paying off highest interest rate debt. ie doesn't make sense to buy a tractor cash that would finance at 5% if you have your fertilizer/seed/etc on a 9% unsecured operating line of credit.

My per acre machinery costs are hard to figure given the tractors do snow removal half the year?


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## mlappin (Jun 25, 2009)

No-till goes a _long_ ways to keeping machinery costs down. A lot cheaper to run a tractor with a 60' spray boom than running a chisel plow, disc or field cultivator.


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## JD3430 (Jan 1, 2012)

I use tractors for snow, bush hogging and other tasks that make money, too. However, a round baler can only make round bales, a Tedder can only Ted, etc.


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## chrisjohnsons (Feb 12, 2013)

I like the advice in this article, thanks for sharing.

"Illinois data show a 9% annual increase in depreciation between 1995 and 2011, Paulson says"


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## mlappin (Jun 25, 2009)

NDVA HAYMAN said:


> I am also way below the $100 price per acre but I pay for my equipment up front. Don't know how that would correspond if I had to make payments. Being under $100 might mean that I can buy a new tractor?   or at least convince myself that I should? Naw. I'll just keep my old stuff.


Depends on what I'm buying. I had the cash on hand to buy the Polaris Ranger outright, but I qualified for the 1.9% financing, at that low a rate it's free money. Besides at the time having a new crop of corn or beans to deliver was a long ways off and if I had paid cash, then needed to use more out of my operating line of credit, my operating line has a higher interest rate than 1.9%. Besides the wife has a low credit score, not bad credit just no credit so I'm going to use her credit card to make the payment then auto transfer the payment amount to her card every month.


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## somedevildawg (Jun 20, 2011)

Sorry to say but I'm way above that mark....I need to sell some stuff


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## JD3430 (Jan 1, 2012)

somedevildawg said:


> Sorry to say but I'm way above that mark....I need to sell some stuff


II bet I am, too. Therefore I will put my head in the sand and not read the article. Lol


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## swmnhay (Jun 13, 2008)

mlappin said:


> Depends on what I'm buying. I had the cash on hand to buy the Polaris Ranger outright, but I qualified for the 1.9% financing, at that low a rate it's free money. Besides at the time having a new crop of corn or beans to deliver was a long ways off and if I had paid cash, then needed to use more out of my operating line of credit, my operating line has a higher interest rate than 1.9%. Besides the wife has a low credit score, not bad credit just no credit so I'm going to use her credit card to make the payment then auto transfer the payment amount to her card every month.


Sometimes there is a catch with the low interest from manufactures.They usually will give you a cash discount if you don''t take the low interest money.


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## deadmoose (Oct 30, 2011)

My $35k tractor would have given me $1k off vs 60 mos at 0%. Enough for me NOW to finance.$200 a year to have a new tractor financed. If I had the cash I would take the money off.


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## mlappin (Jun 25, 2009)

swmnhay said:


> Sometimes there is a catch with the low interest from manufactures.They usually will give you a cash discount if you don''t take the low interest money.


I paid well below MSRP on it. I did check on cash discounts as well, not any cheaper to pay cash than finance.


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## swmnhay (Jun 13, 2008)

mlappin said:


> I paid well below MSRP on it. I did check on cash discounts as well, not any cheaper to pay cash than finance.


Yea,I've had it both ways.Sometimes better to take cheap interest,sometimes better to pay cash.And sometimes it makes a difference if you are tradeing and not paying a big difference it has worked better to take a cash disc vs low interest.

Both Vermeer & Kubota have given a Mfg cash discount in lieu of takeing the low interest payments.

Polaris I also financed to get low interest because they did not offer a cash discount.


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## JD3430 (Jan 1, 2012)

I did the math. Looks like I'm in the lower 25% of profitability. I'm like 145/acre. 
Oh fiddlesticks.....


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## somedevildawg (Jun 20, 2011)

JD3430 said:


> I did the math. Looks like I'm in the lower 25% of profitability. I'm like 145/acre.
> Oh fiddlesticks.....


At least you did the math jd.....I'm afraid to...


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## barnrope (Mar 22, 2010)

The article didn't take into consideration livestock production, custom work for others, or other farm enterprises besides row crops. If I just use my acres, I am down there at the bottom right now after heavily investing in new and newish iron last fall. SF1 green star and an integrated steering valve this spring didn't help either. Hope it was worth it.


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## JD3430 (Jan 1, 2012)

I was even worse, but just paid off 2 machines. I don't see how this can be anything more than a guideline. Everyone has to reinvest in machinery every so often
I just happened to buy everything I needed to get started, some used, some new. Can't see how my numbers will look good at start up, but as equipment gets paid off, the scenario starts to look better I guess.


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## haybaler101 (Nov 30, 2008)

I have been following this thread and decided to chime in. Started thinking back to Purdue Ag Econ classes and looked up this link for reference.
https://www.extension.iastate.edu/agdm/crops/xls/a3-29machcostcalc.xlsx

Machinery cost doesn't go away when a machine is paid for, but it remains as long as you own the machine or a subsequent machine. The only time you can negate machinery cost when paid for is if your master plan includes retirement from the business before the machine will need to be replaced. The other really effective way to reduce machinery cost is to spread the machine over more acres. Buying a junk baler, spending gobs of money on repairs and downtime and then having machine worth scrap price in the end doesn't necessarily give you a lower machinery cost over buying a new baler every 3 to 5 years if you have the acres to justify it. Bad thing is, I am Purdue educated and preaching to everyone but I do not have a good handle on my own machinery cost. I know there too high, but I have been in an expansion mode and have some overkill.


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## Mike120 (May 4, 2009)

haybaler101 said:


> , but I have been in an expansion mode and have some overkill.


I struggle with this issue with every new manufacturing facility I get involved with in my other life. How do you account for (or value) pre-investment that will provide flexibility and expandability to an operation? I haven't found a way yet, other than to look at what it will cost you if you don't do it. I've built some pretty elaborate monte carlo models, but at the end of the day you're betting that the operation will be successful, you'll need it, and it will provide a future value.. If you don't believe that.....why the hell are you doing it in the first place? Elaborate bean counting is often a pretty big waste of time.


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## mlappin (Jun 25, 2009)

This is a very simple formula, it doesn't take into account if your paying interest on those loans that the interest can be deducted to lower your tax burden. It also doesn't take into account the depreciation on equipment which also lowers your tax burden. Most importantly it doesn't take into account whether all the money you have wrapped up in your equipment is to make $80/ton hay or $300/ton hay.

I sold all last years corn in the 7-7.50 range and paid all my loans off on the hay equipment. Taking into account my previous payments and maintenance costs and the amount of hay I made last year (which was less than I will have next year) I come in around $70/acre. Take next year with no equipment costs and just average repairs and well it's obscenely low, still low even if I figure in the cost of alfalfa and OG seed plus my time to plant. Costs are not a hundred percent accurate though. I also use the haymaking tractors for other chores. One cab tractor spreads all the fertilizer on the row crop ground and spreads manure, the other was on the feed grinder all winter. The raking tractor is hooked to tile cart right now. Tedding tractor has the box scraper on it, etc. Wonder how I figure the cost of the feed grinder? Yearly payments divided by number of cows fed? number of cows sold? I know what I paid for it but I also know I went thru less hay than normal due to practically no waste and the cows are looking the best they ever have coming out of a long wet somewhat cold winter. So do I figure in improved cow health which should lead to improved calf gain?

Did all the books, taxes, and number crunching I'm going to do for the year, I'll let somebody else count the beans.


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## Vol (Jul 5, 2009)

Moderation is a key element in life. As with all things, a dose of common sense and moderation will greatly contribute to success. Don't buy the largest or the smallest.....buy what will do the job very efficiently. Life is short.....don't get too caught up in the mouse excrement.

Regards, Mike.


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## haybaler101 (Nov 30, 2008)

Mike120 said:


> I struggle with this issue with every new manufacturing facility I get involved with in my other life. How do you account for (or value) pre-investment that will provide flexibility and expandability to an operation? I haven't found a way yet, other than to look at what it will cost you if you don't do it. I've built some pretty elaborate monte carlo models, but at the end of the day you're betting that the operation will be successful, you'll need it, and it will provide a future value.. If you don't believe that.....why the hell are you doing it in the first place? Elaborate bean counting is often a pretty big waste of time.


That is why I do not have a good handle on my own cost, if I need it and can cash flow the payments, I buy it.


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## JD3430 (Jan 1, 2012)

haybaler101 said:


> I have been following this thread and decided to chime in. Started thinking back to Purdue Ag Econ classes and looked up this link for reference.
> https://www.extension.iastate.edu/agdm/crops/xls/a3-29machcostcalc.xlsx
> Machinery cost doesn't go away when a machine is paid for, but it remains as long as you own the machine or a subsequent machine. The only time you can negate machinery cost when paid for is if your master plan includes retirement from the business before the machine will need to be replaced. The other really effective way to reduce machinery cost is to spread the machine over more acres. Buying a junk baler, spending gobs of money on repairs and downtime and then having machine worth scrap price in the end doesn't necessarily give you a lower machinery cost over buying a new baler every 3 to 5 years if you have the acres to justify it. Bad thing is, I am Purdue educated and preaching to everyone but I do not have a good handle on my own machinery cost. I know there too high, but I have been in an expansion mode and have some overkill.


I mean technically speaking, if I have 3 new machines under warranty, wouldn't my repair costs be close to zero? 
I spent a lot of money all last summer repairing old equipment. 
The other thing not considered is what is the price we pay for a paid off baler that's 10 yrs old and breaks while trying to scoop up 100 acres of hay before a rain? Maybe many tons of hay lost. I know everyone has a different way of doing it, but I'd rather make payments on newer more reliable equipment than tear what little hair i have left out fixing paid off junk while trying to bale. Hay equipment must run when it's show time. No time for extensive wrenching. 
Of course, the best scenario is NEW paid off equipment, but that's a pretty tough trick to pull off when you're only in your 2nd year of business.


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