BALER RUNNING COSTS VITAL FOR STRAW PROFITS
The importance of knowing your operating costs – ideally
on a per unit basis – is imperative for all contracting
operations, reports Grant Thorntons Alastair Hart.
When calculating operating costs for a high density
square baler, the obvious unit is a single bale, therefore
all costs should be brought down to this
DEMAND for straw has been high over the past few years.
With depressed arable incomes, many farmers now see straw as an asset they can realise in tangible cash terms through selling it, when it may previously have been chopped and incorporated.
There is also the influence of new, straw-fired power stations in the east of England, which are part of the governments commitment to produce more energy from renewable sources.
But how does a contractor calculate the cost of running a high density baler? How does he know how much he needs to charge to cover costs, and what the margin is on each bale?
Table 1 looks at the total cost per bale of running a high density square baler. This is based on:
• A high density square baler, producing 0.5 tonne bales at an average output of 50 bales/hour
• A 160hp tractor used to power the baler. This is assumed to be used for other operations, too, with total annual use at 1100 hours.
In table 1, the cost per bale for the baler and the tractor are calculated and brought down to a per bale basis. The fixed costs consist of interest on the capital, average depreciation over its expected life and insurance. Both machines are assumed to be retained for six years.
The total annual fixed costs for the baler are then divided by the expected number of bales per year – 12,000 in the example. This gives a cost per bale, to which is added an assumed cost for spares and repairs and the cost of twine at 50p/bale. The total cost for the baler alone is £1.62/bale.
The total annual fixed costs for the tractor are divided by the expected annual hours – 1100 in the example. To this is added the labour and fuel costs per hour, and the expected cost of spares and repairs. This gives a total cost per hour, which is then divided by the output of the baler – 50 bales/hour – to give a cost of running the tractor per bale – 53p in the example.
The cost of running the baler and tractor are, therefore, £2.15/hour. Based on these assumptions, the tractor is used for around 250 out of the total 1100 hours for baling operations. The remainder of the cost of running the tractor is allocated to other uses.
Table 2 shows the sensitivity of the total cost per bale to changes in the number of bales produced per season.
• At 7500 bales/year, the cost per bale is £2.75
• At 9000 bales/year, the cost per bale is £2.46
• At 15,000 bales/year, the cost per bale is £1.98
This includes the effect of reduced spares and repairs cost to 4% and reduced tractor hours with fewer bales produced, and increased spares and repairs cost to 8% along with increased tractor hours when the number of bales produced increases.
Based on these figures, and using an assumed contractors charge of £2.75/bale, the total net profit would be £2610 at 9000 bales, £7080 at 12,000 bales and £11,550 at 15,000 bales.
For a farmer considering whether he should purchase a baler or use the services of a contractor, the break-even number of bales/season in the example is 7500. At this point, the expected cost of running a high density square baler and tractor is equal to the contractors charge. This is based on the assumption that a 160hp tractor is already available for use.
Through our work with a wide range of farmers and contractors, we have found that those who regularly calculate and review their costs on a per unit basis are usually the more successful businesses. They know their break-even prices and consequently when best to accept or decline opportunities. *
High density Existing 160hp
square baler tractor
Purchase price after discount 60,000 58,000
Selling price after six years 18,240 17,632
Average value 39,120 37,816
Interest at 6% 2,347 2,269
Average depreciation at 18% 6,960 6,728
Insurance at £15 per £1000 587 567
Total annual fixed costs 9,894 9,564
Bales/hours per year 12,000 1,100
Fixed costs per bale/hour 0.82 8.69
Labour cost/hour 10.00
Fuel cost/hour 4.70
Twine cost/bale 0.50
Spares and repairs at 6% of new price 0.30 3.16
Total cost per hour 26.56
Total cost per bale at 50 bales per hour 1.62 0.53
Combined cost per bale 2.15
Cost per bale Contractors Net profit Total
charge per bale per bale net profit
£ £ £
7500 bales/year 2.75 2.75 0.00 0.00
9000 bales/year 2.46 2.75 0.29 2,610
12,000 bales/year 2.16 2.75 0.59 7,080
15,000 bales/year 1.98 2.75 0.77 11,550