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Machinery Considerations

Posted Apr. 1, 2002

The purchase, maintenance and replacement of agricultural machinery and equipment are some of the most important tasks performed by farm and ranch managers.

Machinery and equipment often represent 50 percent or more of non-land annual farm and ranch operating costs. Therefore, having the proper amount of useable equipment is one of the keys to profitable farming and ranching. Too often, machinery and equipment related decisions are made during periods of duress (the tractor is "down" and the crop has to be planted). In some cases, machinery and equipment purchases become consumptive spending ("I've always wanted one of those"...). Each machinery or equipment purchase is critical to the overall profitability of an operation. Management decisions regarding crop varieties, fertilizer rates and pesticides can be reviewed and revised yearly. However, machinery purchase decisions involve large sums of capital and can affect the profitability of the farm or ranch business for several years. The goal of sound machinery and equipment management is to:

  • Maintain a complement of machinery that permits timely, high quality field performance at the lowest net unit cost.
  • Achieve a high rate of return to machinery investment.
  • Keep machinery equity at a reasonable level.
  • Have a positive effect on the financial well-being of the farm business.

 

Agricultural producers have differing attitudes toward the "benefits" of machinery and equipment. Have you ever wondered why some blame the high cost of machinery and equipment for putting them out of business while others seem to have every new machine that comes out? Arriving at the proper complement of machinery and equipment for each farm and ranch operation involves the analysis of a number of factors, many of which differ from one operation to another. Perhaps the one element that "spreads" the per unit cost of machinery and equipment among farms more than anything else is the effect of income tax brackets on after-tax machinery and equipment costs. If the average annual cost (before taxes) of operating a tractor for 500 hours is $10,000, the after tax cost per hour varies from $18 per hour for the 10 percent marginal tax bracket to $13 per hour for the 35 percent marginal tax bracket. This is a 25 percent lower cost per hour for the operation in the higher tax bracket. And this is only the expense deduction. When depreciation and Section 179 deductions are taken into account, the after-tax net unit cost differences between low income (10 percent marginal tax rate) and high income (35 percent marginal tax rate) operations is even more pronounced!

Thought for the month: "The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." Adam Smith, The Wealth of Nations (1776)

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