Advice on managing machinery costs before BPS phase-out

Arable businesses are being urged to scrutinise machinery costs and purchasing policy ahead of the potential industry changes arising from the government’s new Agriculture Bill.

AHDB benchmarking data shows machinery represents 25-30% of the cost of producing a tonne of wheat – comfortably the largest outlay.

This has mostly been driven by increasing retail values, with a recent report from the National Office of Statistics revealing an 80% surge in machinery prices between 2009 and 2019 (60% in real terms).

Factors such as emissions regulations are partly to blame, as they have led to increased development and manufacturing costs that are inevitably passed on to the buyer.

We look at how to calculate and reduce your machinery costs, whether to hire or buy and we see how three farms have managed their machinery budgets.

See also: Low-input cropping plan slashes costs and risk for tenant farmer

Machinery costings – key points

  • Reduction of subsidy post-Brexit puts costs under spotlight
  • Do cost analysis for all arable machinery operations
  • Benchmark against others to identify potential savings
  • Consider pros and cons of ownership and contract hire
  • Machinery sharing offers attractive reduction in fixed costs

Less cash

According to AHDB machinery specialist Harry Henderson, rising costs are likely to continue, and with the Basic Payment Scheme (BPS) being phased out by 2028, cash to spend on kit could be in shorter supply.

“The basic payment currently makes up about 50% of farm income and if that’s going to change substantially, farmers are going to have to review all of their outgoing costs, and machinery should be high on the list,” says Mr Henderson.

He adds that changes to crop rotations and more emphasis on environmental gains, such as improving soil health, are central to the new Ag Bill and will also influence what machinery is required in the future.

This may mean investment in cultivation kit that moves less soil, or even a direct drill. In turn, this could result in less horsepower requirement when tractors are up for replacement.

“Start to understand the Ag Bill and what it will mean for your farm and its machinery choices. Also, do your research and understand your costs before you go to a dealer or manufacturer.

“This will ensure you get the machinery that suits your business and not theirs.”

How to calculate operational machinery costs

To help examine costs and identify areas where savings can be made, Strutt & Parker’s George Badger offers a step-by-step guide to calculating the cost of each arable operation.

He uses drilling as an example, but the same principles can be applied to any tasks.

1. Labour Work out cost of labour an per hour (A), inclusive of national insurance, pension contributions, training and accommodation where provided.

2. Tractor cost an hour This will factor in depreciation over the life of the machine, which is the current value, less residual value at the point of sale, divided by the number of years the machine is expected to be retained (lifespan).

Repairs, insurance and any interest should be added to the depreciation cost and this figure is divided by total annual hours to give a total price per hour.

It is then necessary to factor in fuel cost, ideally using real life data from machine telematics.

However, farms may not know exact fuel use figures, so a way of estimating for fuel use on “heavy” work, such as deep cultivation, is multiplying horsepower by 0.125. For example, a 240hp machine would be 240 x 0.125 = 30litres/hour.

When carrying out “medium” work, such as drilling, use hp x 0.1, so 240 x 0.1 = 24 litres/hour.

This is then multiplied by fuel cost (p/litre) to give a £/hour fuel cost, which is added to total machine price/hour to give a total cost/hour (B) for the tractor.

3. Work rate The work rate of the machine is calculated by estimating how many hectares the drilling operation can do in a 10-hour day. If the area is 40ha, you divide 40 by 10, giving a work rate of 4ha/hour (C).

4. Implement cost/ha This is done by working out the drill’s depreciation in the same way as the tractor, adding repairs and interest if applicable, and dividing by the number of hectares done in a year, giving a per hectare cost of the implement (D).

5. Formula Taking all the different costs components of the operation and work rate together, the following formula should be applied: ((A + B) ÷ C) + D. This provides an operational cost of drilling (£/ha).

6. Benchmark This figure can then be benchmarked against others. The range of drilling operational costs across the AHDB Monitor Farm initiative is £16-£63/ha, with the average being about £30/ha.

For those above the average, it identifies an area where costs can be trimmed. It should be noted that the ‘average’ figure acts as a comparable guide to operational costs for benchmarking across the Monitor Farm group.

However, it does not include costs such as filling the drill with seed or road travel, so if pitching for contracting, a percentage would need to be added to cover those hidden extras.

How to trim costs

So how do businesses go about trimming costs? Mr Henderson says it is very difficult to be prescriptive, as farms vary hugely in size, complexity and management ethos.

As a rule of thumb, smaller farms below 200ha have an easier time controlling machinery costs, as they need minimal capacity, make good use of contractors and sell grain straight off farm if necessary.

They also tend to go for an ownership model, where machinery is bought and kept for longer. This usually works out cheaper, but increased breakdowns, repair costs and downtime are potential risks.

For larger units of 400ha plus, one might expect that having more land would help reduce costs, but this is rarely the case. In fact, production costs tend to be much higher, as significant capital can be locked up in infrastructure.

With a larger hectarage, managers also tend to go for hire purchase options on large kit, with all servicing and repairs taken care of by a dealer.

While this enables high work rates and minimal downtime in working windows during busy periods, it can also significantly increase machinery costs and overall cost of production.

“I think expanding an operation has to come with a clear warning that it may not reduce your costs, especially if you have pockets of land spread around and you end up spending a lot of time on the road instead of farming,” says Mr Henderson.

Hire v buy

The most difficult decisions – particularly on policies such as contract hire versus buy – will be for mid-sized farms around the 200-400ha mark.

Much will come down to the individual business’s attitude to risk and how much flexibility they need in terms of capacity for operations such as drilling and harvesting.

For example, where growers are really making a combine sweat, he or she will not be willing to risk any downtime and leaving crop in the field, so would much rather hire purchase and be looked after by a dealer.

This will come at a price though, so considering an ownership model, buying second hand and running machines longer could help trim costs if the business is willing to accept the associated risk.

“Can farms look at joint ventures? Have they got any neighbours that can nip in and do a bit of baling, so they don’t need a baler? Can they share the cost of a combine or two and get crops cut?”

Case study: Large business opts for contract hire to reduce bills

After a review of costs for the 2017-18 cropping year, farm manager David Hurst identified areas where machinery expenditure could be trimmed at Royston-based Law Farming.

The farm was running a fleet of Fendt wheeled tractors, but over time they became increasingly unreliable and some unexpected and hefty repair bills started to drop through the office door. 

David Hurst standing in front of a tractor

David Hurst © Alan Bennett

With its last Fendt 930 costing £150,000 and sold four years later for £70,000, depreciation of £80,000, plus an average of £5,000 per year servicing costs (not on a service programme), meant the total cost over four years was £100,000 or £25,000/year.

The big repair and depreciation costs were reflected in a benchmarking exercise as part of the Duxford Monitor Farm group, with the business in the highest 25% in both categories.

In response, the farm has opted to go down the contract hire route, replacing the large wheeled tractor with a Challenger, which incurs a £20,000 annual hire charge based on 1,000 hours per year, including servicing and breakdowns.

This has seen a significant increase in output for overall spend and, as the hire is classed as a business expense, it is deductible against tax paid on profit. 

But for Mr Hurst, it is also about managing risk.

“The Challenger is no more or less reliable than the Fendt, but when it goes wrong backup is comprehensive and another machine is always on offer until they get ours running again. We don’t incur any further big costs,” he explains.

Following success with the crawler, the farm has sold two trailed sprayers plus a 200hp Fendt tractor and replaced them with a contract hire 36m self-propelled Horsch Leeb PT 280.

At more than £4,000/month, it sounds expensive, but has allowed the farm to take a man and three bits of machinery out of the business.

Additional means of controlling depreciation costs involve the purchase of good quality second-hand kit and offloading unwanted or underused items around the farm.

“Before Christmas, I did look at purchase prices of a new combine and a large machine before discount started at £600,000, so when we come to change our combine next year, we will more than likely look at contract hire for that as well.

“We need the equipment, but don’t think there is enough profit in farming to spend more than half a million on one machine. We simply cannot afford to have that much capital tied up machinery and, ultimately, depreciation.”

Case study: Ownership and in-house maintenance key for family business

Almost all machinery is owned on Tom Mead’s 300ha Bleak House Farm, as he doesn’t want to be lumbered with high finance costs in difficult years.

Just one tractor – an ex-demo John Deere 6155R – was on finance and paid off over a short two-year term. This limits the time the business will be committed to payments and any associated interest.

Tom Mead with sprayer

Tom Mead © Alan Bennett

The same tractor also has a four-year, 4,000-hour service plan. However, barring any disastrous breakdowns over that period, Mr Mead would be unlikely to sign up to one again, as it is essentially paying for an insurance policy that should be unnecessary for a new machine.

Instead, all maintenance of the machinery fleet is carried out between Mr Mead and his father, with service intervals kept tight and minor issues fixed quickly before escalating into major ones.

This ensures residual value of the machines remains as high as they can possibly be and helps to keep costs in check.

“Our two mainline tractors will be kept up to 8,000 hours, because I think that’s the only way on a small acreage that you can make the initial investment stack up,” he says.

This is reflected in Mr Mead’s farm being just below average for total arable machinery costs when benchmarked against peers in the Monitor Farm group.

Case study: Collaboration cuts machinery costs

An evolving machinery sharing arrangement has allowed three farm businesses to reduce combining costs and the tie-up is likely to expand across more operations in the future.

Matt Doggett, who farms about 400ha at Barley, near Royston, entered into a machinery share back in 2000 with two neighbours, selling all their combines and hiring one over a five-year period.

Ralph Parker and Matt Doggett standing in a field

Ralph Parker and Matt Doggett

At the end of the five years, one business left the agreement and after two more years of hiring, the remaining two business sold all the kit they didn’t need and bought a combine for the 2008 season, working across a total of about 730ha.

The purchase and running costs were split 50-50, including all spares, repairs and labour.

As the machine had the capacity to work harder, Mr Doggett entered discussions with another neighbour, Ralph Parker, who farmed 400ha just a stone’s throw from the other two farms at Litlington.

“Initially, it was actually talking to Ralph and finding out if he had the same attitude as us and whether we could deal with each other on a business level.

“That is vital – you have to be able to get on, discuss things honestly and make decisions,” explains Mr Dogget.

It was concluded that if all three farms were run as one holding, it would only require one good-sized combine, so the existing five- and six-straw walker machines were sold and they purchased a new 30ft cut New Holland CR8.90, split exactly three ways.

Mr Parker estimates they have saved well in excess of £100,000 in capital costs by going to a single combine, along with savings in labour, insurance and improvements in logistical efficiency.

The three farms now also share two 6m cultivators, and both Mr Parker and Mr Doggett see closer collaboration in other operations, such as drilling, in the future.

There is also the potential for more labour sharing across the three farms.

“Some of the challenges include a lot more calls to sound the other parties out before making a decision, but it has worked very well so far,” says Mr Doggett.

The information in this article was shared at a recent AHDB Duxford Monitor Farm meeting in Fowlmere, Cambridgeshire.

AHDB has a cost calculator to help farmers work out operational costs of machinery. For more information, go to the AHDB website.

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