BUY NEW TACKLE
BUT BE PRUDENT
Buying new machinery to maintain efficiency is as important
as ever. Peter Hill relays some timely advice to help guide
your tackle-buying decisions at this years Cereals Event
INVESTMENT in new machinery is surely more difficult to justify with wheat at barely £70/t. That may be the case, but with the right capital budgeting it is not impossible, explains a leading accountant.
Dont stop spending on machinery – but do it in a controlled and properly budgeted way, explains Gary Markham, of agricultural accountant Grant Thornton.
His logic is clear. "If you dont make plans to reinvest, there will come a time when those expensive items of machinery will be simply too old and unable to operate properly. Few growers need to run equipment until it falls apart."
By spreading purchases of equipment such as tractors, combines, sprayers, telescopic handlers and cultivations tackle, it is possible to replace a large item of machinery every couple of years.
"The key is to use capital budgeting as a management tool to cover the replacement period of most major items of machinery," Mr Markham explains. "That way, money can be put back into the business over a longer period, to cover the replacement costs of new machines as they fall due."
"But farmers can no longer afford to make spur of the moment buying decisions for machines like combines, tractors and telehandlers," Mr Markham adds. "It is reasonable to demand a longer working life from modern equipment, so why operate a short-term replacement policy when all you do in the first few years is stomach the depreciation?"
Additionally, unplanned purchases can often lead to cash-flow problems which, in turn, brings on a different set of headaches.
He suggests operating a capital budget plan to cover a period of up to eight years, then writing into the budget when changes of major machinery items are expected.
Estimate the resale values of machines when calculating the capital budget to arrive at net change-over costs for each year, and then average the figures over the period of the budget to provide an annual average change-over cost. This can then be set aside for machinery reinvestment.
"Capital budgeting serves two purposes," Mr Markham suggests.
"Growers can plan machinery replacement policies and the cash required for them; and it provides a means of assessing whether or not the business is over- or under-mechanised.
Once the average annual change-over cost has been calculated from the capital budget, this figure needs to be divided by the farms area to determine how much capital per hectare needs to be put back in to purchase new equipment.
This should ideally be the farms target depreciation – a higher figure suggests over-investment in machinery while a lower figure suggests more money needs to be put back in.
Capital budget for typical 400ha arable unit
Expected replacement price and year in which changed
Machine Age (years) 1998 1999 2000 2001 2002 2003 2004
Combine 3 110,000
100hp tractor 7 32,000
200hp tractor 5 68,000
Seed drill 2 28,000
SP sprayer 6 52,000
Tele-handler 4 28,000
New values 28,000 32,000 52,000 68,000 110,000 – 28,000
– less approximate 12,000 14,500 8,500 16,500 25,000 – 3,500
trade-in value –
Net change-over cost 16,000 175,000 44,000 51,500 85,000 — 24,500
Average annual change-over cost £34,071 (total net divided by number of years) or £85/ha.
A recent costings survey carried out by Grant Thornton on 32,376ha (80,000 acres) of arable land – 55% of it wheat – gave a combined labour and machinery cost of £260/ha (£105/acre) after excluding an amount for property maintenance.
On a typical 283ha (699 acres) arable unit, 44% of this figure is spent on crop establishment (31% of it before drilling), a further 21% on crop maintenance and the remaining 35% towards harvesting.
"Its an eye-opener to see exactly how much money goes into producing a seed-bed," Mr Markham comments. "Although growers still need good equipment to keep their target planting dates, there are many machines and systems that could help to the job quicker and easier – and without affecting yield."
With wheat at £70/t, a 10% drop in yield on an 8t/ha crop drops income by £56/ha – which would make a significant contribution towards most farms annual machinery investment.
Machinery needs replacing regularly to maintain efficient production. A planned strategy of investment will ensure no unpleasant surprises, advises Gary Markham.