Fast and Simple Method

Fast and Simple Method - Learning for life A Fast and...

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A Fast and Simple Method to Learning for life Estimate Typical Machinery Costs Paul D. Mitchell, Agricultural and Applied Economics, UW Madison/Extension (608) 265-6514, pdmitchell@wisc.edu Machinery costs for grain and forage production are often difficult to accurately estimate, but are an important component of production costs. Controlling machinery costs is important for maintaining or improving profitability, as machinery costs often separate profitable farms from unprofitable farms. Machinery costs often equal or even exceed total costs for variable inputs such as fertilizer, seed, and herbicides. Also, farmers can do little to profitably change these input costs, but they can affect their machinery costs. The goal here is to describe a fast and simple method to estimate machinery costs for a “typical” farmer to develop a quick cost of production estimate or to provide benchmark for comparison. More complex methods provide more detailed and accurate cost estimates, but require more records and time to develop. This fast and simple adjusts easily obtainable custom rates to estimate machinery costs. Beaton, Dhuyvetter, and Kastens (2003) developed the method using data from Kansas farmers. They used detailed cost data to calculate per acre machinery costs for each farmer, and then calculated a relative cost ratio—the ratio of each farmer’s cost to the state average custom rate for that operation. They found that farmer machinery costs ranged from as low as 55% to almost 250% of the custom rate, indicating a wide variation in farmer machinery costs and one of the major factors separating profitable farms from unprofitable farms. Dhuyvetter and Kastens (2005) believe that this wide variation in machinery costs also holds in Wisconsin. Beaton, Dhuyvetter, and Kastens (2003) propose several reasons why farmer machinery costs are usually higher than custom rates. Custom operators spread fixed machinery costs over more acres, so their total costs per acre are lower than for an owner-operator. Custom operators may be more efficient, such as by finding good deals on machinery purchases and getting volume discounts, or can justify larger equipment purchases and so obtain economies of scale. Also, because the farmer has less control over the timing of custom operations (e.g., the custom work is only done once the custom operator has finished with his own land), custom rates have to be discounted. Also, custom operators have lower labor and management costs—clients determine when and where to perform operations and the settings to use; the custom operator arrives when he can and does what he is asked. Finally, farmers performing custom operations for neighbors,
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Fast and Simple Method - Learning for life A Fast and...

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