FROM OLD TO NEW: REPLACING YOUR COMBINE
Originally published on June 27, 2005
Effective machinery management is essential in maintaining the profitability of your farm.
With the prospect of a large harvest looming, machinery dealers are describing recent combine sales as brisk. Terry Deneiko of Saskatoon's Farm & Garden Centre said that the John Deere dealership has sold 19 new combines so far this year.
Replacing your combine is not for the faint of heart. A lot of money is needed to own and operate these machines. In my calculations, I have assumed that a new 280 horsepower conventional combine with pickup can be purchased for $250,000.
For those who insist on a used machine, I have assumed that the same 280 hp combine with 1,750 separator hours can be bought for $120,000. Operating cost assumptions are outlined in the accompanying table.
What does it cost to run your existing combine? How many acres do you need to harvest annually in order to justify buying new? When should you consider renting a combine or simply hiring a custom combiner?
By knowing these costs on a per acre basis, farmers can evaluate their combine's return and efficiency.
To see what your estimated annual combine costs might be, in the table I have calculated the per acre costs of running my new and used combines over a range of areas.
You can see how the combine per acre costs decrease as harvested acres increase.
For example, if you are using a new combine and are harvesting 2,300 acres of crop each year, then the calculated new combine cost is $19.53 per acre.
Driving a used combine over the same 2,300 acres lowers your combine cost to $13.70 per acre. Both amounts include an hourly depreciation, investment, repair, fuel, lube and oil and labour cost.
After reviewing your own per acre costs, you will have to decide at what point you can justify the trade off of profitability against increased reliability and pride of owning a new combine.
While it is possible to rent a combine, equipment dealers will never guarantee their availability. Dealers are in the business of selling combines, not renting them. So while renting combines for lower acreage makes sense in years when demand for combines is high, rental may not be an option.
My calculated rental rate per acre in the table is $20.38. The used combine per acre costs beats this rental rate at all reported acreage levels.
I have found that there is often more comfort in maintaining your farm's profitability than there is in using the newest equipment.
Typically the thrill of the ride and pride in a new machine wears off quickly.
Good managers know their machine costs on a per acre basis and are better able to understand and manage how it affects their farm's profitability. To survive in the future, your capital investment in machinery must be managed to be effecient.
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.