Depreciation of farm machinery cost cereal growers in England £110/ha on average in 2010-11, according to DEFRA’s Farm Business Survey (FBS). In 2006-07 the figure amounted to just £75/ha.

That marks a 47% rise in just five years, by far the biggest increase of all fixed costs. Machinery depreciation is now the largest overhead of all, accounting for more than a fifth of all fixed costs, easily overtaking land, property and general farming outgoings and now double the regular labour bill.

The driving force behind the figures is the spiralling price of new machinery, reflecting increasing global demand for steel from developing economies and also its increased affordability as demonstrated by rising agricultural commodity prices, says Paul Wilson, associate professor of management and economics at Nottingham University and chief executive of Rural Business Research, the body that collates the FBS.

“Actual depreciation levels vary widely between individual farm businesses, but these figures reflect a trend that most growers will recognise,” says Dr Wilson.

However, tackling the problem is not straightforward, he adds. “It is very difficult to benchmark as there are so many variables between enterprises, the key one being soil type.

“People who have above average, but not excessive costs are often doing a very good job, using their investment wisely to carry out field operations at the appropriate time and reaping the yield benefits.”

Farm size, perhaps surprisingly, appears to have little effect. “When you look at the figures across small, medium and large businesses there is no common pattern,” says Dr Wilson. “The average figures change very little.”

However, contract costs are significantly lower on large units, averaging £37/ha, compared with £82 and £86/ha on medium and small units, respectively, he points out.

“This shows these smaller units are not benefiting to the same degree from their machinery and their depreciation costs are somewhat misleading. Adding back the contract charge shows their overall machinery costs are considerably higher.

“Arguably they are over-mechanised compared with their bigger neighbours.”

A key reason is these businesses want to retain a level of independence, but cannot achieve the economies of scale more hectares bring. “As machinery becomes increasingly advanced and expensive, owning it becomes increasingly difficult to justify on smaller farms,” he says.

“Some are choosing to buy when they might be better off building a relationship with a contractor. That is key – you cannot use contractors as a fire brigade – look after them and they will look after you, investing in and planning for the business you put their way.”

Arrangements with neighbours, either by joint ownership with costs divided by hectares worked, or through strategic sharing where each partner owns a different machine, can work well.

“Machinery rings are not the force they once were, though some are doing well and could be another option.”

Hiring in is another method, often adopted by serious arable businesses geared to winter crops during their peak two- to three-month autumn cultivation period. “This really depends on economies of scale – you really have to pile the hours on to make it pay.”

When it comes to driving down depreciation costs on owned machinery such as tractors, ensuring they are used to their full potential is key, says Dr Wilson. When it comes to resale value the key killer is age before hours (see table above), increasingly so as technology develops, he says.

“The same goes for other complex machines such as combines and sprayers.

“Technical improvements mean you can often take these machines to much higher hours than even a few years ago.

“That means they can and must be worked much harder – you have to ask if doing less than 1,000 hours per year in a modern tractor is right. In 10 years’ time the technology will be very dated, which will undercut resale values. Make the most use of them while they are relatively new.”

Bigger machines cost more, depreciate quicker and don’t get used so much, he adds. “Buy the appropriate machine for the job to ensure you are working it to its full potential.”

Age, however, is relative. Five- or six-year replacement policies are now common, with well-maintained machines still retaining good resale values after that period.

“Three-year policies are probably a luxury in most cases these days,” says Dr Wilson. “Some growers relying on a machine to produce high-value crops may be able to justify the high rates of deprecation that result, but most cereals growers would struggle.”

Given their increased reliability, these second-hand machines make sense for smaller growers who would otherwise be saddled with unsustainably high depreciation charges, says Dr Wilson.

“These growers are unlikely to have the need for cutting edge technology of their bigger neighbours, so buying older machines, particularly combines that can keep running reliably into their mid-teens and beyond, can make sense.

“However, there are some good finance packages around for new machinery that won’t be available for the second-hand market, so it is not always clear cut.”

Farmers can use the FBS website (www.farmbusiness survey.co.uk/benchmarking) to benchmark a whole range of financial measures against similar sized farms, including profit and loss account, gross margins and balance sheet as well as performance measures such as machinery depreciation.

Using this system ensures like is compared with like – the FBS uses 20% annual depreciation on a declining balance, based on current (replacement) costs. Some farmers use historic costs, which can underestimate depreciation by up to 20%, or tax accounts, which can greatly overestimate depreciation in the early years, says Dr Wilson.

“However, don’t get misled by fine detail – one farm’s figures may be slightly higher than another’s for reasons already discussed. Benchmarking is a tool that highlights areas that need looking at – there are plenty of pointers to consider to ensure a business is taking the right approach.”