Steep price rises put focus on machinery costs
© Tim Scrivener High machinery costs, leading to a high depreciation burden, are forcing a rethink on replacement policies and how operations are managed.
The relentless rise in machinery costs has pushed up depreciation so that instead of a rolling five-year replacement plan, many businesses are now working on an eight-year schedule for the main machines such as combines, sprayers and tractors.
See also: NAAC contractor price guide 2023-24
Labour and machinery costs (often referred to as operational costs) have historically made up 38-45% of total production expenditure for cereal businesses, says consultant Jamie Gwatkin.
This share may have reduced slightly for the 2022 and 2023 harvests because of high fertiliser and other direct variable costs.
However, machinery and labour costs have locked in increases because of the relentless rise in machinery purchase prices and well-deserved wage awards, he says.
Jamie advises arable businesses, including the Joint Venture Farming Group, a group of four companies whose individual member businesses have each pooled labour and machinery from several farms to form a joint venture to contract back services to the individual farms.
Close analysis of operational costs is critical to ensure producers know their cost of production and farming contractors preserve their margins, he advises.
“Depreciation is the largest single element of a business’ operational costs. This cannot be managed on an annual basis, but must be allowed for over five to eight years.
“Farmers and contractors are having to make machines last longer. The objective is to maintain a level or reducing cost per annum over the plan period.
“To achieve this, the total investment in machinery should not exceed the total of the deprecation cost over the term of the plan.
“For example, if a 1,000ha business is targeting a depreciation cost of £120/ha a year [Jamie’s benchmark], its annual charge would be £120,000, or £960,000 over the eight-year plan.
“In this case, the total replacement investment over the plan period should not exceed £960,000.”
If the business cannot meet the target, it may be because it has too much machinery employed with the farming/contracting operation.
This is where benchmarking using the “horsepower per hectare” measure is helpful, he suggests.
His benchmark for combinable crops businesses is 0.7-1hp/ha, excluding combines. If that cannot be achieved, a review is in order.
For example, some farms keep too many tractors and would be better off selling one and hiring when needed. Another option is to share a key piece of machinery such as a sprayer or combine.
Operation costs
To cost each operation, the price of the operator, the machine (including depreciation) and the implement (each on a per-hour basis) need to be known and the total of the three divided by the work rate (hectare/hour) to get the cost/ha.
“Most large businesses and contractors cost out each machine and implement each year. Typical machine costings will include the estimated hours used, depreciation cost, fuel [litres/hour x estimated price x hours used], repairs and maintenance cost and insurance cost [optional]. This will give the estimated cost per hour for that machine.”
Jamie points to a handy AHDB calculator (PDF) for this measure.
Calculating this for each machine and implement and then applying the work rate of the task allows the cost to be calculated.
Taking things a step further to arrive at actual costs, he and a colleague have developed an online time-recording and costings tool that calculates each operation by crop, farm and external contract operation, including margin achieved.
Farmcosts has been built using Joint Venture Farming Group data since 2004. It requires timesheet and fixed-cost data to be uploaded and then produces actual costs, which are available to businesses for benchmarking.
So far this has offered interesting pointers:
- The need to extend the main item replacement policy to eight years rather than five
- Operator quality has a significant effect on cost performance – this has enabled decisions to be made about who operates what kit
- Better identification of underused kit – if a farm has five tractors, for example, it may be that a cheaper operating option would be to sell the fifth tractor and hire one in when needed
- Enables lowest cost combination of tractor and implement to be identified – for example, moving from a 4m to a 6.4m drill.
Warranties
Because machines are being kept for longer, extended warranties and maintenance agreements are important for key machines, but attitudes vary about their worth.
The cost differs between supplier and machine, so it has to be viewed on a case-by-case basis.
“Some business managers have taken a policy decision that they will not pay for maintenance packages and take the hit if it arises,” says Jamie Gwatkin.
“In certain cases this has proved to be right, but this does not take into account the down time if a combine or sprayer has a significant breakdown and the manager cannot get hold of a replacement machine.”
Most warranties tie the machine owner to dealer servicing as part of the package.
“Work out the cost per hour of the extended warranty and check what is included – for example, if there is a breakdown, will a replacement be supplied or will you be relying on goodwill and a dealer putting in a demo machine if one is available?”
Some manufacturers now offer complete maintenance packages for eight years.
Contractor machinery management tips
Farmers Weekly asked recent Contractor of the Year Award winners for their views on machinery use and replacements.
Tim Russon – P Russon & Sons, New Farm, Lincolnshire – winner 2020
Big rises in machinery costs mean Tim Russon is keeping tractors longer than in the past, pushing Fastracs to 10,000-12,000 hours and aiming to keep depreciation down to £10/hour.
He is meticulous about costs, emphasising the importance of calculating depreciation per hour.
A large part of his business is forage harvesting, and for this and all jobs he measures fuel use on a per-acre, per-hour and per-tonne basis.
He tries to run a “one machine, one operator” policy. “It doesn’t always work that way, but it helps if an operator has charge of a piece of kit,” he says.
Daily checks are carried out and repair needs brought to his attention quickly.
Tim takes out extended warranties on most tractors, but says that beyond 6,000 hours these are getting expensive.
“If it costs me more than £4/hour then it’s generally not worth it,” he says.
Warranties often don’t include a replacement machine, but insurance can be taken to cover this, or a good relationship with a dealer may mean a temporary replacement can be supplied.
He will spend on technology where this can make his business more efficient or offer something that the farmer customer may not have.
For example, weigh cells on muckspreaders can help get the best value from manure.
Martin Hays – Martin Hays Contracting, Top Farm, Derbyshire – winner 2022
Martin Hays does not have a fixed replacement policy. He buys good second-hand kit where possible, or will take a deal on a new machine if it looks right at the time – for example, if it makes financial sense because new technology makes the spend justifiable.
“We got grant aid for an N-sensor. It cuts out the need for field maps and satellite data and we can do a more efficient job for the customer.”
He generally takes advantage of manufacturer finance, saying this tends to be competitive, but cautions that if you want to go off-plan in terms of timing, it can become expensive.
In the past four or five years Martin has seen contractors used in a more planned fashion, when previously they tended to be used more last-minute or on a fire-brigade basis.
This is partly due to machinery costs, he says, but also because of the difficulty in getting farm staff.
Many livestock farms have underused machinery, he says, suggesting that if they undertook better machinery maintenance this would help not only with timely working, but they would also benefit from better second-hand values, as these have risen so much.