$$ and Sense by Jeremy Hutchings* Ploughing in profits
GroundCover™ Issue: 45
AN ANALYSIS of grain and mixed enterprises has shown that, in southern NSW, farm machinery operating costs (including depreciation) range from $39/ha to $121/ha.
But there is no significant difference in yield between these businesses.
While it is nice to have new machinery, it is important to understand the impact machinery has on the profitability of your business.
Some key questions to ask of your operation are:
- Am I over-capitalised?
- Do I spend too much on maintaining and operating machinery?
- Is my machinery efficient?
Technological developments in farm equipment have a role to play in increasing productivity through allowing improved timeliness, plant establishment and soil management. But what is the cost of these technologies to your bottom line?
The true cost of owning machinery
Machinery operating costs including fuel, repairs, freight, contractors and purchases (net of sales) and machinery financing amount to one-third of the cost of growing a crop. As shown below these costs are rising.
While we are buying new machinery, repairs and fuel costs have doubled in some cropping regions over the last 15 years, driven by inflating prices for fuel (up 33 per cent), contracting (up 24 per cent) and maintenance (up 22 per cent). There has been no apparent saving in labour.
In contrast, farm income has increased by 30 per cent, with trends to higher crop intensities, increasing farmed scale and overall productivity.
Are you ploughing in your profits?
In the southern Mallee, the best farmers are spending 28 per cent of their average income on operating machinery -7 per cent or $13/ha less than the average producer. Expenditure on machinery ranges from $23/ha to $72/ha. Shaving $1-2/ha of the fuel bill, for example, must be our focus.
To check your situation, assess your machinery investment levels and operating against the following ORM Guidelines:
|% of 5 yr average income|
|Machinery investment levels|
|Contracting (or plant hire)||5|
|Machinery (purchases + financing)||12|
|Total machinery costs||32|
When current machinery value is less than budgeted income, then machinery investment is efficient.
When machinery costs (as above) are 32 per cent of average annual income or less, then expenditure on machinery is well balanced.
Getting the balance right between machinery operating costs and your average income is critical to optimising business performance and ensuring that profits are not unnecessarily diminished by plant.
* Jeremy Hutchings is an Agricultural Consultant with O'Caliaghan Rural Management, a leading agricultural consulting firm based in Bendigo, Victoria. For mOTe information, contact Jeremy Hutchings on 03 5441 6176, or email firstname.lastname@example.org
Region South, North