May 31, 2019
Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.
When I figure my breakeven costs for corn and soybean production, how should I handle equipment? Currently, I’m adding in an estimate of the spending I’ll be doing on repairs and payments.
Stout: If you are regularly replacing your equipment, your method may work for you. You need to account for the fixed cost of owning your equipment, which can also be done by using your yearly depreciation tax schedule. However, this can easily be way off, depending on if you have a lot of machinery that is fully depreciated, or have a lot of newly purchased machinery.
As you no doubt know, farm equipment will last a long time, a lot longer than the seven years or less that it is depreciated. The most accurate method might be where you take the cost of each piece of equipment divided by a typical life in years divided by the acres you farm to give you a per acre fixed cost for your machinery. That, along with an estimate of repair costs, and fuel and oil, will give you a fairly accurate estimate of machinery cost per acre.
Zhang: Farm equipment costs could be broken into two categories: annual ownership costs, which occur regardless of machine use, and operating costs, which vary directly with the amount of machine use.
The interest payments you are already including is one type of ownership cost, but there is at least another major ownership cost: annual depreciation. Typically, this is calculated based on the economic life of the machinery, or how many years you think the machine could function, and it is typically less than the service life.
A good rule of thumb is to use an economic life of 10 to 12 years for most farm machines and a 15-year life for tractors, unless you know you will trade sooner. You have already included repairs and maintenance which is part of the operating cost, you also need to account for costs for fuel, lubrication and operator labor. Iowa State University Extension Ag Decision Maker File A3-29 has a worksheet for you to calculate precisely both the ownership and operation costs of equipment, called “Estimating Farm Machinery Cost” by ag economist William Edwards.
Miller: When we figure breakeven costs with customers, we usually try to tie in the amounts needed to cover variable and fixed costs, living expenses, and profits and payments. On machinery, we use estimates from Iowa State University budgets for fuel and oil expenses per acre. To estimate repair costs, we look at Schedule F repair costs from the prior year, or an average of the last three years, and divide that number by the crop acres (this includes hay) for the upcoming year.
Last, but not least, we will take all the machinery payments for the upcoming year and divide them by total crop acres to give us an “approximate value” for the fixed cost of farm machinery. This practice should tell us what prices are needed to cover machinery costs in our cash flows.
Cautionary note: If your machinery has been refinanced to stretch out payments, the principal that you pay on the equipment may be less than the real life depreciation of that equipment. If that is the case, this “approximated value” will not provide you with enough money to cover replacement of worn equipment. Instead, you run the risk of equipment being worn out before it is fully paid for.
Cash rent can be costly
I have some cash-rent ground where the rent my landlord insists that I pay him is too high for the land’s productivity. But the rest of the land I rent from him is better soil, and it pencils out. How should I approach my landlord to rectify this situation? I farm in a very competitive area for renting land.
Stout: Assuming you have yield maps showing the yields on every portion of the fields, you could show your landlord the part of the farm that is losing money and appeal to him on that basis. Also, you could show him a soil type map indicating CSR or CSR2 levels, which are a fair indicator of yield potential. One of the best methods is to look at the ISU Cash Rental Survey, which can be found on the Ag Decision Maker website. You can look up your county, where it is broken down by high-, medium- and low-quality ground. It also indicates average rents per bushel of corn yield, bean yield and per CSR2 index point.
If drainage is an issue, perhaps the landlord would be interested in adding tile to improve productivity. If the landlord is interested, he could also consider the continuous CRP pollinator program for the poorer-yielding areas, although in many cases it would pay him less than he is receiving in cash rent.
Plastina: In areas where farmland is in high demand and bids are very competitive, cash rents can be temporarily decoupled from productivity indicators. After all, landowners in those areas can easily replace their current tenants with other farmers eager to pay higher rents.
High bidders might be able to break even through economies of scale in machine and management costs, or simply might be willing to cover loses in newly rented acres using profits from other parts of their operations.
Since you are renting multiple parcels from the same landowner, a reasonable strategy would be to approach him or her with soil, yield and CSR2 maps to discuss the cash rent you are paying per CSR2 point or per bushel of corn or beans in each of the parcels. However, I would not expect much sympathy from your landowner based on this argument when aggressive bidders show up in your area.
A complementary strategy would be to discuss ways to improve soil health and productivity of the high-rent parcel through state and federal programs.
Miller: Current low prices have caused us to closely examine the soils of our southern Iowa farm fields. We have found that on many fields, by the time you take out the end rows and field borders that the deer eat (or the edges of the field that should have stayed in hay production), you may have taken out more than half the acres available in that field. This is often why those fields don’t measure up in yields when compared to other fields on the same farm. The operator and landlord may think about how “good the ridgetop is” and completely forget about the impact of those bad acres.
To help operators and landlords visualize the impact of these less-desirable acres, we have printed out a map of the field and cut out the poor-yielding acres. Then, we compare those cutout acres to the rest of the field. We found that this “sizing” visualization sometimes works better than a simple soil map or CSR2 index map.
Bottom line: If the poor acres lose enough money to offset the profits on the better acres and the landlord won’t adjust the rent, you may be better off looking for another piece of ground to rent.
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