The Price of Ownership
The past couple weeks we have been exploring the art of smart purchase making by determining if the new piece of equipment you are looking to buy is worth it as well as questions to ask yourself prior to buying. We will continue with this theme by exploring this week how to determine the operating costs of farm equipment.
If your purchase appears to be the right decision at this point, let’s look at your potential owning and operating costs.
Alan Miller, farm business management specialist in the Agricultural Economics Department at Purdue University says, “Operating costs will include fuel and labor or the operator’s time.”
Remember these costs easily using the acronym DIRTI: depreciation, interest on capital, repairs, property taxes and insurance.
“Since equipment will provide services that will provide benefits over a number of years, costs must be allocated over the useful lives of equipment,” Miller continues. “Depreciation is a way of allocating the initial purchase price over multiple years.”
There are different means of determining depreciation of your farm equipment. Deciding which method is smartest for you is a conversation for you and your accountant or tax professional.
Ownership costs will vary between pieces of equipment and between individual farming situations, so it’s hard to predict exact numbers. You can get ballpark figures with comprehensive tools developed by William Lazarus, PhD, professor and extension economist in the University of Minnesota Department of Applied Economics.
- The Machinery Repair Cost Calculator estimates repair costs per year and per hour or per acre for tractors, combines and implements based on their age, their use and the cost of a new machine.
- The Machinery Cost Calculator asks you to input many details about the equipment—interest rate, fuel cost, equipment age, hours of use, et cetera—and calculates ownership cost, fuel and lube, and repairs and maintenance, plus total costs per acre and per hour.
In addition to these hard-and-fast numbers, it's up to you to take into consideration the stress of learning to use the equipment and the effort you’ll save by owning the equipment. These intangible details are harder to quantify.
Taking into account the full cost of the equipment you have your eye on will reduce the financial surprises down the road and help you make the right decision for your farm.