What’s your per acre equipment investment? Have you ever calculated it? A huge variation exists from one farm to the next and if you’re on the high side, it means your fixed costs are also high.
With the commonly used financial ratios, such as working capital and debt to equity, there are generally accepted benchmarks for what’s healthy and what’s worrisome. With farm equipment investment per acre, it isn’t as clear cut.
If you have irrigation, if you run a pedigreed seed operation or if you grow a lot more specialty crops, there’s a reason for having a higher equipment investment than your neighbours. However, many farms just have a lot invested in iron with little apparent justification.
Farm accountants who track this among their clients say the low end of the scale tends to be $200 to $300 in farm equipment per acre. A lot of producers are in the $300 to $400 per acre range, while some grain producers in Western Canada are $500, $600 or even $800 an acre.
This is much more than the variation that exists between most farms on cash costs, yet we spend a lot more time talking about and worrying about the price variations in fertilizer, seed and crop protection products.
To do the equipment investment per acre calculation, make sure to include the value of leased equipment. No, you haven’t bought it, but you’re paying for it nonetheless. The lease payments are covering the depreciation.
A low equipment investment per acre means a low fixed cost, but it might also mean that you will have trouble getting field operations done in a timely manner and so this can be a false economy.
However, the more typical problem is equipment investment that has grown much faster than the acreage base.
Jonathan Small, a farm management consultant with MNP in Red Deer has a simple rule of thumb for putting your machinery investment into perspective. Assume that 25 percent of the investment is an annual cost.
How is this derived? Well, typical machinery depreciation is 15 to 20 percent a year. Then there’s the cost of money and the cost of repairs and insurance.
Depreciation is a paper cost until you go to sell or upgrade. Some might argue that big pieces of equipment are holding their value pretty well. However, relative to new equipment, values rapidly diminish.
According to Alberta Agriculture’s monthly farm input price survey, the price of a new four-wheel drive tractor in the 325 to 375 horsepower range has increased from $290,000 to $390,000 in the last three years.
In just the past two years, the price of a Class 7 combine has gone from $340,000 to $490,000.
Using the 25 percent rule of thumb, a farm with an equipment investment of $350 an acre has an annual cost of around $87 an acre. A farm with an equipment investment of $650 an acre has an annual cost of about $162 an acre. On a 3,000 acre farm, this $75 per acre difference is $225,000.
The Farm Progress Show is coming soon to Regina followed by Ag in Motion near Saskatoon in July. The shiny new iron will be enticing, but before making major equipment decisions, it can be useful to evaluate your machinery investment per acre.
It’s unfortunate that more information isn’t available on the typical investment levels in each region. That would allow producers to make more relevant comparisons.