Estimating Farm Machinery Costs
Machinery and equipment are major cost items in farm businesses. Larger machines, new technology, higher prices for parts and new machinery, and higher energy prices have all caused machinery and power costs to rise in recent years.
However, good machinery managers can control machinery and power costs per acre. Making smart decisions about how to acquire machinery, when to trade, and how much capacity to invest in can reduce machinery costs as much as $50 per acre. All these decisions require accurate estimates of the costs of owning and operating farm machinery.
Farm machinery costs can be divided into two categories: annual ownership costs, which occur regardless of machine use, and operating costs, which vary directly with the amount of machine use.
The true value of these costs cannot be known until the machine is sold or worn out. But the costs can be estimated by making a few assumptions about machine life, annual use, and fuel and labor prices. This publication contains a worksheet that can be used to calculate costs for a particular machine or operation.
Ownership costs (also called fixed costs) include depreciation, interest (opportunity cost), taxes, insurance, and housing and maintenance facilities.
Depreciation is a cost resulting from wear, obsolescence, and age of a machine. The degree of mechanical wear may cause the value of a particular machine to be somewhat above or below the average value for similar machines when it is traded or sold. The introduction of new technology or a major design change may make an older machine suddenly obsolete, causing a sharp decline in its remaining value. But age and accumulated hours of use are usually the most important factors in determining the remaining value of a machine.
Before an estimate of annual depreciation can be calculated, an economic life for the machine and a salvage value at the end of the economic life need to be specified. The economic life of a machine is the number of years over which costs are to be estimated. It is often less than the machine’s service life because most farmers trade a machine for a different one before it is completely worn out. A good rule of thumb is to use an economic life of 10 to 12 years for most farm machines and a 15-year life for tractors, unless you know you will trade sooner.
Salvage value is an estimate of the sale value of the machine at the end of its economic life. It is the amount you could expect to receive as a trade-in allowance, an estimate of the used market value if you expect to sell the machine outright, or zero if you plan to keep the machine until it is worn out.
Estimates of the remaining value of tractors and other classes of farm machines as a percent of new list price are listed in Tables 1a and 1b. Note that for tractors, combines and forage harvesters the number of hours of annual use is also considered when estimating the remaining value. The factors were developed from published reports of used equipment auction values, and are estimates of the average “as-is” value of a class of machines in average mechanical condition at the farm. Actual market value will vary from these values depending on the condition of the machine, the current market for new machines, and local preferences or dislikes for certain models.
The appropriate values in Table 1 should be multiplied by the current list price of a replacement machine of equivalent size and type, even if the actual machine was or will be purchased for less than list price.
An example problem will be used throughout this publication to illustrate the calculations. The example is a 180-PTO horsepower diesel tractor with a list price of $200,000. Dealer discounts are assumed to reduce the actual purchase price to $180,000. An economic life of 15 years is selected. The tractor is expected to be used 400 hours per year.
For the 180-hp tractor with 400 hours of annual use in the example, the salvage value after 15 years is estimated as 23 percent of the new list price:
Salvage value = current list price x remaining value factor (Table 1)
= $200,000 x 23%
= $ 46,000
Total depreciation = purchase price - salvage value
= $180,000 - $46,000
If you borrow money to buy a machine, the lender will determine the interest rate to charge. But if you use your own capital, the rate to charge will depend on the opportunity cost for that capital elsewhere in your farm business. If only part of the money is borrowed, an average of the two rates should be used. For the example we will assume an average interest rate of 7 percent.
Inflation reduces the real cost of investing capital in farm machinery, however, since loans can be repaid with cheaper dollars. The interest rate should be adjusted by subtracting the expected rate of inflation. For our example we will assume a 2 percent inflation rate, so the adjusted or “real” interest rate is 5 percent.
The joint costs of depreciation and interest can be calculated by using a capital recovery factor. Capital recovery is the number of dollars that would have to be set aside each year to just repay the value lost due to depreciation, and pay interest costs.
Table 2 shows capital recovery factors for various combinations of real interest rates and economic lives. For the example, the capital recovery factor for 15 years and 5 percent is .096. The annual capital recovery cost is found by first multiplying the appropriate capital recovery factor by the difference between the total depreciation, then adding the product of the interest rate and the salvage value to it.
For the example values given above:
Capital recovery = (total depreciation x capital recovery factor) + (salvage value x interest rate)
= ($134,000 x .096) + ($46,000 x .05)
= $12,864 + $2,300
= $15,164 per year
Taxes, insurance, and housing (TIH)
These three costs are usually much smaller than depreciation and interest, but they need to be considered. Property taxes on farm machinery have been phased out in Iowa, except for very large inventories. For states that do have property taxes on farm machinery, a cost estimate equal to 1 percent of the average value of the machine is often used.
Insurance should be carried on farm machinery to allow for replacement in case of a disaster such as a fire or tornado. If insurance is not carried, the risk is assumed by the rest of the farm business. Current rates for farm machinery insurance in Iowa range from $4 to $6 per $1,000 of valuation, or about 0.5 percent of the average value.
There is a tremendous variation in housing provided for farm machinery. Providing shelter, tools, and maintenance equipment for machinery will result in fewer repairs in the field and less deterioration of mechanical parts and appearance from weathering. That should produce greater reliability in the field and a higher trade-in value. An estimated charge of 0.5 percent of the average value is suggested for housing costs.
To simplify calculating TIH costs, they can be lumped together as 1 percent of the average value where property taxes are not significant.
TIH = 0.01 x (purchase price + salvage value) / 2
For our tractor example, these three costs would be:
TIH = 0.01 x ($180,000 + $46,000) / 2
= $1,130 per year
Total Ownership Cost
The estimated costs of depreciation, interest, taxes, insurance, and housing are added together to find the total ownership cost. For our example tractor this adds up to $16,964 per year. This is almost 10 percent of the original cost of the tractor.
Total ownership cost = $15,164 + $1,130
= $16,294 per year
If the tractor is used 400 hours per year, the total ownership per hour is:
Ownership cost per hour = $16,294 / 400 hours
= $40.74 per hour
Operating costs (also called variable costs) include repairs and maintenance, fuel, lubrication, and operator labor.
Repairs and Maintenance
Repair costs occur because of routine maintenance, wear and tear, and accidents. Repair costs for a particular type of machine vary widely from one geographic region to another because of soil type, rocks, terrain, climate, and other conditions. Within a local area, repair costs vary from farm to farm because of different management policies and operator skill.
The best data for estimating repair costs are records of your own past repair expenses. Good records indicate whether a machine has had above or below average repair costs and when major overhauls may be needed. They will also provide information about your maintenance program and your mechanical ability. Without such data, though, repair costs must be estimated from average experience.
The values in Table 3 show the relationship between the sum of all repair costs for a machine and the total hours of use during its lifetime, based on historical repair data. The total accumulated repair costs are calculated as a percent of the current list price of the machine, since repair and maintenance costs usually change at about the same rate as new list prices.
Figure 1 shows how repair costs accumulate for two-wheel drive tractors. Notice the shape of the graph. The slope of the curve increases as the number of hours of use increases. This indicates that repair costs are low early in the life of a machine, but increase rapidly as the machine accumulates more hours of operation.
Because the tractor in the example will be used about 400 hours per year, it will have accumulated about 6,000 hours of operation by the end of its 15-year economic life (400 hours x 15 years = 6,000 hours). According to Table 3, after 6,000 hours of use, total accumulated repair costs will be equal to about 25 percent of its new list price. So, total accumulated repairs can be estimated to be:
Accumulated repairs = 0.25 x $200,000
The average repair cost per hour can be calculated by dividing the total accumulated repair cost by the total accumulated hours:
Repair cost/hour= $50,000 / 6,000 hours
Fuel costs can be estimated in two ways. AgDM Information File A3-27, Fuel Required for Field Operations (PM 709) lists average fuel use in gallons per acre for many field operations. Those figures can be multiplied by the fuel cost per gallon to calculate the average fuel cost per acre.
For example, if the average amount of diesel fuel required to harvest an acre of corn silage is 3.25 gallons, at a cost of $3.40 per gallon, then the average fuel cost per acre is $11.05.
Average fuel consumption (in gallons per hour) for farm tractors on a year-round basis without reference to any specific implement can also be estimated with these equations:
0.060 x maximum PTO horsepower for gasoline engines
0.044 x maximum PTO horsepower for diesel engines
For our 180-horsepower diesel tractor example:
Average diesel fuel consumption =
0.044 x 180 horsepower = 7.92 gallons/hour
Average fuel cost per hour =
7.92 gallons/hour x $3.40/gallon = $26.93/hour
Surveys indicate that total lubrication costs on most farms average about 15 percent of fuel costs. Therefore, once the fuel cost per hour has been estimated, you can multiply it by 0.15 to estimate total lubrication costs.
For our tractor example, average fuel cost was $26.93 per hour, so average lubrication cost would be:
Lubrication = 0.15 x $26.93 = $4.04/hour
Because different size machines require different quantities of labor to accomplish such tasks as planting or harvesting, it is important to consider labor costs in machinery analysis. Labor cost is also an important consideration in comparing ownership to custom hiring.
Actual hours of labor usually exceed field machine time by 10 to 20 percent, because of travel and the time required to lubricate and service machines. Consequently, labor costs can be estimated by multiplying the labor wage rate times 1.1 or 1.2. Using a labor value of $15.00 per hour for our tractor example:
Labor cost per hour = $15.00 x 1.1= $16.50
Different wage rates can be used for operations requiring different levels of operator skill.
Total Operating Cost
Repair, fuel, lubrication and labor costs are added to calculate total operating cost. For the tractor example, total operating cost was $55.80 per hour:
Total operating cost =
$8.33 + $26.93 + $4.04 + $16.50 =
$55.80 per hour
After all costs have been estimated, the total ownership cost per hour can be added to the operating cost per hour to calculate total cost per hour to own and operate the machine. Total cost per hour for our example tractor was:
Total cost = $40.74 + $55.80 =
$96.54 per hour
Costs for implements or attachments that depend on tractor power are estimated in the same way as the example tractor, except that there are no fuel, lubrication, or labor costs involved.
Costs for used machinery can be estimated by using the same procedure shown for new machinery. However, the fixed costs will usually be lower because the original cost of the machine will be lower. And repair costs will usually be higher because of the greater hours of accumulated use. Therefore, the secret to successful used machinery economics is to balance higher hourly repair costs against lower hourly fixed costs. If you misjudge the condition of the machine such that your repair costs are higher than you anticipated, or if you pay too high a price for the machine so that your fixed costs are not as low as you anticipated, the total hourly costs of a used machine may be as high or higher than those of a new machine. See AgDM Information File A3-22, Buying Used Machinery for more information.
As an example of estimating costs for a used machine, assume you just bought a 25-foot chisel plow that was 6 years old for $16,000. It appeared to be clean and in good mechanical condition. Since you do not know for sure how many hours of accumulated use it has, you can estimate by multiplying its age (6 years) by your own expected annual use (100 hours per year), or 600 hours.
What is the estimated total cost of the plow over the next 8 years? From Table 1, the expected salvage value at the end of 13 years is 31 percent of the current list price of an equivalent machine (estimated to be $40,000), or $12,400.
The capital recovery factor for 8 years and a 5 percent real interest rate is .155 (Table 2). Capital recovery costs are:
Capital recovery= (.155 x ($16,000 - $12,400)) + ($12,400 x .05)
= $558 + $620
= $1,178 per year.
For taxes, insurance and housing:
TIH = 0.01 x ($16,000 + $12,400) / 2
= $142 per year
Total fixed costs = $1,178 + $142
= $1,320 per year
If the plow is used an average of 100 hours per year:
Ownership cost/hour = $1,320 / 100 hours
= $13.20 per hour.
To estimate average repair costs, use Table 3. If you intend to keep this plow for 8 more years, the accumulated hours of use after that time will be:
Accumulated hours = 600 + (100 hours/yrx 8 years) = 1,400 hours
Now, using Table 3, note that the accumulated repair cost for a chisel plow after 600 hours is 14 percent of the new list price. After 1,400 hours it is estimated at 45 percent. Thus, the accumulated costs from 600 to 1,400 hours can be estimated at 45 percent minus 14 percent, or 31 percent of the new list price. If the list price for a 25-foot chisel plow is $40,000, the repair costs for the next 8 years are estimated to be:
Repair costs = .31 x $40,000 = $12,400
The repair cost per hour is estimated to be:
Repair cost per hour = $12,400 / (1,400 - 600) hours
= $12,400 / 800 hours
= $15.50 per hour
Other variable costs, such as fuel, lubrication, and labor, have already been included in the variable costs for the tractor, so the total cost per hour for the disk is simply the sum of the ownership costs per hour and the repair costs per hour:
Total cost= $13.20 + $15.50 = $28.70 per hour.
When estimating future costs for a machine that you have already owned for several years, start with your best estimate of the current market value of the machine instead of its original purchase price, or use the salvage value factors in Table 1 to estimate its current value.
Total Costs per Operation
Tractor costs must be added to the implement costs to determine the combined total cost per hour of operating the machine. Total costs in the example are:
Total cost = $96.54 + 28.70 = $125.24 per hour
Finally, total cost per hour can be divided by the hourly work rate in acres per hour or tons per hour to calculate the total cost per acre or per ton.
The hourly work rate or field capacity of an implement or self-propelled machine can be estimated from the effective width of the machine (in feet), its speed across the field (in miles per hour), and its field efficiency (in percent). The field efficiency is a factor that adjusts for time lost due to turning at the end of the field, overlapping, making adjustments to the machine, and filling or emptying tanks and hoppers.
Field capacity (in acres per hour) is calculated by:
(width x speed x field efficiency) / 8.25
For example, if the 25-foot plow can be pulled at 4.5 miles per hour with a field efficiency of 81 percent, the estimated field capacity is:
Field capacity = (25 x 4.5 x 81%) / 8.25
= 11 acres per hour
AgDM Information File A3-24, Estimating Field Capacity of Farm Machines (PM 696), has typical accomplishment rates for different types and sizes of farm machines.
If the 25-foot plow in the example can cover 11 acres per hour, the total cost per acre for disking is:
Total cost per acre = $125.24 / 11 acres
= $11.39 per acre.
Costs for operations involving self-propelled machines can be calculated by treating the self-propelled unit as a power unit, and the harvesting head or other attachment as an implement.
Income Tax Considerations
The tax treatment of different methods of acquiring machine services is a major factor in evaluating machine costs. If a machine is purchased, all variable expenses except unpaid labor are deductible when determining income tax liability. Housing expenses, taxes, insurance, and interest payments made on a loan to finance the machine purchase are also tax deductible.
Depreciation for tax purposes is calculated quite differently from economic depreciation due to the actual decline in value of a machine. Tax depreciation methods reduce salvage value to zero after a few years for most machines. Tax depreciation expense is useful for calculating the tax savings that result from a machinery purchase, but should not be used to estimate true economic costs.
Specific rules and regulations on deductible costs and depreciation are discussed in the Farmer’s Tax Guide, published by the Internal Revenue Service.
A worksheet for estimating machinery costs is provided, or Decision Tools (spreadsheet calculators) are also available from the Ag Decision Maker website, including the Machinery Cost Calculator and Grain Truck or Wagon Transportation Cost Calculator.
Other publications that will help you make good machinery management decisions are:
- Estimating Field Capacity of Farm Machines PM 696 (A3-24)
- Fuel Required for Field Operations PM 709 (A3-27)
- Combine Ownership or Custom Hire PM 786 (A3-33)
- Acquiring Farm Machinery Services PM 787 (A3-21)
- Farm Machinery Selection PM 952 (A3-28)
- Joint Machinery Ownership PM 1373 (A3-24)
- Transferring Ownership of Farm Machinery PM 1450 (A3-32)
- Replacement Strategies for Farm Machinery PM 1860 (A3-30)
- Fieldwork Days in Iowa PM 1874 (A3-25)
- Machinery Leasing - Is it for You? (A3-35)
- Buying Used Machinery (A3-22)
, retired economist.