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What Should My Machinery Investment Be - Frequently Asked Questions | |
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| | How should I size my machinery to fit my operation?
Generally, a farm manager tries to equip his or her operation to be able to successfully complete all farming operations in a timely manner. At the same time, the farm manager has to ensure that machinery investment is not excessive to the point that it is a financial drain on the farm business. Machinery management is often a balancing act between timeliness of operations and excess capacity. The balance point is moving target, fluctuating with grain prices and weather conditions.
Machinery is often the second greatest investment next to land on most crop based farm operations. On some farms, machinery may even be the highest investment. These realities underscore the importance of good machinery management.
How do I benchmark my machinery compliment?
The first step in benchmarking any component on a farm operation is keeping proper records. A good set to records will let you know what the market value of your equipment is and allow you to compare this to your long-term gross revenue per acre.
In some analysis of Statistics Canada data for Alberta comparing machinery investment for the years 1998 and 2001, I found that Alberta farmers typically have between 16.85 and 18.13% of their total farm capital invested in machinery. Their net operating income as a percentage of machinery investment varied between 13.6 and 24.4%. It is important to note that the net operating income is calculated before machinery depreciation.
An important benchmark for managers to consider is the machinery investment (market value) per acre divided by the long-term average gross revenue per acre. Based on the analysis, this ratio varies between 1.63 and 1.7. This means that the average farmer in Alberta has between $1.63 and $1.70 invested in machinery for every $1 they receive in gross revenue annually. Using a management depreciation (as opposed to Capital Cost Allowance) rate of 10%, one can see that machinery fixed costs amount to between 16 and 17% of gross revenue per acre. This is the figure that contribution margin has to cover over the long term.
How do I keep my machinery costs in line?
If you are finding that your equipment is sitting idle a good deal of the time compared to your neighbor's, it may mean that you have over capacity. A ratio analysis should quickly point this out. Renting more land to spread your machinery fixed costs may be one solution to getting your costs in line. Alternatively, eliminating any unused or underused equipment may by your answer.
On the other side of the coin you may find that you just cannot physically get your crop seeded or harvested in a manner timely enough to prevent quality losses. In situations like this you may want to consider using a custom operator to improve timeliness without incurring a huge capital expenditure. If, however, you find you are still lacking capacity you may have to purchase additional equipment. Knowing your farm's benchmark situation will allow you to properly size that additional equipment.
Further information can be found on the Alberta Agriculture and Rural Development Website www.agric.gov.ab.ca or by calling an Alberta Agriculture Business Management Specialist at 310-FARM.
Useful sites:
Benchmarking
Farm Machinery Cost Calculator
Prepared by Ted Nibourg, Ag-Info Centre, Alberta Agriculture & Rural Development |
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For more information about the content of this document, contact the Ag-Info Centre.
This information published to the web on May 6, 2004.
Last Reviewed/Revised on April 27, 2010.
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