MACHINERY COSTS

The question of whether to keep a piece of farm equipment or buy a new or used
replacement is a major decision for a farmer. To make the right decision, factors such as
the capital requirement, the annual usage cost, capacity, functional efficiency, and
probable reliability must be considered.

Reliability is extremely important to some producers who must make every hour count
at the peak of the machinery-use season. Since machine reliability decreases with usage,
some producers may benefit by trading a particular piece of equipment every 3 or 4 years.
On the other hand another producer may not require as high a degree of reliability and it
may be more profitable for him to buy used rather than new machinery.

The following is a method of estimating the usage cost for (1) a new piece of equipment
based on its expected life, and (2) a used piece of equipment when previous usage is
known. In this method, the total cost of operating a machine is broken down into the
following parts:

Machine Usage Cost (including depreciation, repair, interest, taxes,

insurance and housing).

Fuel and Lubrication Costs

Operator Labor

Machine Usage Cost

Depreciation

Depreciation results from obsolescence and wear. Age is the predominant factor in
establishing the market value of used farm machinery. Consequently, depreciation is
usually considered a fixed annual cost that disregards amount of use, although the
condition of the used machine does affect its market value.

Table M2.1 shows the average market value for various machines up to 12 years old.
The value is expressed in dollars per $1,000 of initial list price ($1,000 ilp).

Because of discounts from list prices or high trade-in allowances, it is assumed that
machines can be purchased outright at 10-percent discount.

As an example from Table M2.1, the first years depreciation per $1,000 ilp for a tractor
is estimated as follows: $1,000 list price-$100 discount-$623 "as is" value after 1 year
= $277 depreciation per $1,000 ilp.

Depreciation for any succeeding year is the loss in value during that year. In the case of
a tractor, Table M2.1 shows that it will depreciate $41 per $1,000 ilp during the second
year ($623 - $582).
 Table M2.1: Remaining "As Is" Values of Farm Machines in Dollars per $1,000 of
Initial List Price

Self-
Age in Propelled Forage Corn Other*
Years Tractors Combines Balers Harvesters Pickers Machines

1 $ 623 $ 596 $ 664 $ 600 $ 585 $ 553

2 582 540 566 529 510 495
3 544 488 483 467 446 443
4 509 442 412 412 389 397
5 476 400 351 364 340 355
6 445 362 300 321 297 318
7 416 327 256 284 259 284
8 389 296 218 251 226 254
9 364 268 186 222 197 227
10 340 243 159 196 172 204
11 318 220 136 173 151 183
12 297 200 116 153 131 163

* Includes moldboard plows, disc harrows, grain drills, corn planters, cultivators and
mowers.

Interest, Taxes, Insurance and Housing

Interest, taxes, insurance and housing are also annual fixed costs independent of
amount of use. The cost for a particular year is found by multiplying the total charge
(11-percent) by the machine's average "as is" value during that year.

Interest is estimated at 8-percent and reflects either the rate paid if money is borrowed
or the return that could be obtained if the money were invested otherwise. Taxes are
assumed to be 1-percent, insurance 1/2-percent and housing (including a service shop), 1-
1/2 percent of the average value during the year.

Total Fixed Cost

The accumulated total cost of depreciation, interest, taxes, insurance, and housing is
estimated from Table M2.2 for tractors and major farm machinery from the time they are
new up to 12 years of age. These costs make no allowance for possible income tax credit
for depreciation.

Using accumulated costs as provided in Table M2.2 simplifies the problem of

determining the fixed cost for a used machine.
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Table M2.2:Accumulated Total Fixed Cost for Farm Machines in Dollars per $1,000 of
Initial List Price (Includes depreciation, interest, taxes, insurance, and
housing.

Self-
Age in Propelled Forage Corn Other*
Years Tractors Combines Balers Harvesters Pickers Machines

1 $ 361 $ 386 $ 322 $ 383 $ 397 $ 427

2 468 494 488 516 532 543
3 568 611 628 632 649 646
4 661 708 749 736 752 738
5 748 797 852 828 841 821
6 830 877 940 908 919 895
7 906 950 1014 980 987 961
8 977 1015 1078 1042 1047 1021
9 1044 1067 1134 1097 1099 1074
10 1106 1120 1180 1146 1145 1122
11 1166 1169 1219 1189 1185 1164
12 1221 1212 1253 1227 1220 1202

* Based on depreciation from Table 1 plus 11% of the average value during the year,
which includes interest (8%), taxes (1%), insurance (1/2%) and housing (1-1/2%).
** Includes moldboard plows, disc harrows, grain drills, corn planters, cultivators and
mowers.

For example, if a 3-year-old tractor is purchased second-hand to be kept for 4 years, the
fixed cost for the period of ownership is determined by subtracting the accumulated fixed
cost at the end of 3 years from the cost at the end of 7 years ($906 - $558 = 338). The
average fixed cost per year will be 1/4 the difference or $84.50 per $1,000 ILP per year.

Repair

Figure M2.1 through M2.12 estimate total accumulated repair costs according to total
hours of use since new.

The costs of replacement parts as well as replacement machines tend to rise in relation
to the original list price. The accumulated repair cost data in figures M2.1 through M2.12
reflect this influence and need not be adjusted for inflation.

When a machinery owner plans to trade or sell a machine, he will not do some normal
repairs. Consequently, to estimate repair costs, assume that 1/2 of the last years repair
costs will not be made.
 A used machine is likely to require greater-than-normal repairs the first year after
purchase because the previous owner probably spent as little as possible on it the year
before he traded. If a dealer overhauls it, the price will be correspondingly higher than the
average market value. However, if the machine is purchased "as is", the new owner
should make allowance in his usage cost prediction for extra repairs.

One way to make such allowance is to assume that the new owner will stand half the
normal repair cost for the previous years. It can also be assumed that he will make only
half the normal repairs in his final year of ownership. Based on these assumptions, usage
cost is estimated as follows:

Fuel and Lubricant Costs

Fuel consumption for a particular make and model of tractor can be approximated from
Nebraska Tractor Test Data. Tractor dealers usually have the results of these tests.
Where Nebraska Test Data are not available, fuel consumption can be estimated from
Table M2.3.

These fuel consumption figures are the average for a year's normal use, and should be
modified in accordance with expected engine loading when used to estimate consumption
for specific jobs. If the tractor is fully loaded, it will use more fuel than indicated in table
M2.3, and it would use less for light work.

The cost of lubricants (oil, grease, filters) can be estimated at 15-percent of the fuel
cost.

Operator Labor

Operator labor must be included in the total cost even if the farmer operates the
machine himself. Include labor at the rate for specific locations and operations.

Custom Rates

Custom rates are often set by tradition and may have little correlations with actual
costs. Custom rates vary significantly with location, even within the same county. Some
traditional custom rates seem excessive, while others are much lower than actual cost.

A fair custom rate could be determined by calculating the machine usage cost, fuel and
lubricant cost, operator labor cost, and adding some profit. The custom rate worksheet on
page M2.10, can be used to estimate a fair custom rate.

Selected References

Richey, C. B., and D. R. Hunt, "Determining Usage Costs For Farm Tractors and Field
Machines." Cooperative Extension Service, Purdue University, AE-81. 1971.
Agricultural Engineers Yearbook, 1975.
 Table M2.3: Average Tractor Fuel Consumption Rates

Average Fuel Average Fuel

Consumption Consumption
Maximum (Diesel)1 Maximum (Diesel)1
Pto hp Gallons per Hour Pto hp Gallons per Hour

20 0.9 150 6.6

30 1.3 160 7.0

40 1.8 170 7.5

50 2.2 180 7.9

60 2.6 190 8.4

70 3.1 200 8.8

80 3.5 225 9.9

90 4.0 250 11.0

100 4.4 275 12.1

110 4.8 300 13.2

120 5.3 325 14.3

130 5.7 350 15.4

140 6.2

1
Multiply by 1.37 for gasoline and 1.64 for LP gas.

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