Manage Capital in 2006

Machinery costs range from 20-25% of total costs for corn, soybean and wheat producers. Compiled by staff 

Published on: Mar 8, 2006

Corn, soybean and wheat producers should pay close attention to their machinery costs in 2006.

South Dakota State University Extension Area Management Specialist Jack Davis says machinery costs range from 20% to 25% of total costs for the three crops. Operating costs of machinery account for approximately 40% of total machinery costs with the other 60% being ownership costs of depreciation, interest, and insurance. One key is to manage productivity on operating machinery. A more important factor is to manage the capital invested in machinery, since 60% of the machinery cost is ownership.

Producers should closely manage machinery ownership cost. "Long-term sound capital management pays the highest dividends," Davis says.

As illustrated below an increase in asset turnover from the South Dakota USDA average of 0.17 to 0.34 provides an additional $185,028 over 5 years. An add-on is the additional $15,400 available for withdrawals per year.

 

Affects of Increased Asset Turnover Rates

South Dakota Farm Example

USDA

Increased Asset Turnover Rates

Assets

$907,000

$907,000

$907,000

Asset Turnover Rate

0.17

0.34

0.51

Gross Revenue

$154,190

$308,380

$462,570

Profit Margin

34%

34%

34%

Operating Profit

$52,425

$104,849

$157,274

Withdraws

15,419

30,838

46,257

Interest

28,571

28,571

28,571

Available for Principal Payments & Investment

$8,435

$45,441

$82,446

Difference in 5 years

 $                   -

$185,028

$370,056


"As most direct input costs escalate and profit margins are reduced, the key factor to profit becomes capital management," Davis says.

One cost that merits consideration is steadily increasing land rental rates. This "escalator" can shrink profit margins if not examined carefully. Farms with a good land base at "reasonable costs" are able to add land at higher costs and continue to keep their profit margins intact.

"This is an area where management needs to carefully analyze the addition of high cost acres. This squeeze in farm profit margins may lead to tougher negotiation sessions concerning land rents. This may include removing low-productive land from the mix," Davis says.