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Corn+Soybean Digest

Cut Equipment Costs To Gain Competitive Edge

As Jack Welch, chairman and CEO of General Electric, once said, "If you don't have a competitive advantage, don't compete." It's that way in his industry as well as in yours. What's the most effective way to gain a competitive advantage in crop production? It's not paying a few $ less per bushel for seed corn or per gallon for herbicide, although those costs are important. There's more opportunity to gain a competitive advantage by managing your machinery and equipment investment per acre.

First, how do you figure where you're starting from in investment per acre? Take your balance-sheet market value of machinery and equipment that's involved in crop production. Divide that figure by your total tillable acres, including your landlord's share if you have crop-share rental agreements.

What should this investment per acre be? Nebraska Farm Business Association data for 1998 indicates the average machinery and equipment investment per acre was $218. It accounted for the biggest income and cost difference among farms. The top-managed farms averaged $121/acre - a $97 (44%) difference. Keep in mind that this difference is from average to top and not bottom to top. Those top-managed Nebraska farms earned a return on assets of 11.3%.

To figure your annual cost of ownership, take the investment per acre times 25%. That includes approximately 10% interest on your investment (either actual or opportunity cost), 10% depreciation and 5% repairs. If your equipment is new, repairs may be less than 5%, but depreciation is probably higher than 10%, so it generally evens out.

At 25%, the annual cost on the $97 difference between top-managed and average farms in Nebraska is $24.25/acre. In some years, that's your profit. And it's close to half the $50 annual profit goal we put in our risk management plans for clients.

If you have any lease or rollover payments, divide them by your total tillable acres and add that figure to your annual-cost-per-acre figure. This provides your annual cost per acre for machinery and equipment.

When you begin doing the math on your operation, you can determine the impact on your bottom line if you could rent 20% more acres and not have to add to your equipment investment. It could mean an $8-10/acre savings on all your acres, adding $ to your bottom line.

That might not be the case if you were to double your acres, however, because then you may need another tractor, combine or other large investment that might even increase your costs. In any event, using this technique to determine your efficiency may be helpful in more effectively managing risk in your operation.

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