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Nuts and bolts

For decades, ag producers have turned to university researchers for information on the latest crop varieties, as well as pest and disease control. Today, economic factors are just as threatening as storms or bugs, so now faculty and staff are dev...

For decades, ag producers have turned to university researchers for information on the latest crop varieties, as well as pest and disease control. Today, economic factors are just as threatening as storms or bugs, so now faculty and staff are developing new tools to help farmers better manage their businesses.

At the 2006 Prairie Grains Conference this month in Grand Forks, N.D., brothers Ron and Greg Dvergsten hosted a learning session on the impact of machinery costs on farm profitability.

Ron is dean of management education at Northland Community and Technical College in Thief River Falls, Minn. Greg is a farm business management educator at the same school. Both men work with the University of Minnesota Center for Farm Financial Management's FINPACK software program.

Why machinery?

"Machinery cost is a new piece of management information that got added to the FINPACK program for the 2005 analysis," Ron says. "It was the first time, I think, that participants in the program and the instructors really took a hard look at it.

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"We hope this creates an awareness that machinery expenditures make up a pretty significant part of the total cost of production," he says.

"It isn't just that we thought this would be fun to talk about," Greg adds. "A lot of guys ask about this stuff because it's important to know."

According to the FINPACK program, fuel, repair costs, direct custom hire, machinery leases, interest on machinery notes and equipment depreciation all combine to determine total machinery costs. The program uses a management depreciation formula of roughly 10 percent the purchase price per year, rather than the more complicated tax depreciation formula.

Northwest Minnesota data

The Dvergstens have used data gathered in 10 northwest Minnesota counties to create a profile of farm investments and costs.

"This isn't statewide data, it comes from northwest Minnesota," Greg says. "It's a pretty large database, about 335 wheat farmers, about the same number of soybeans, so it's fairly reliable data."

According to the data collected so far, machine costs represent about 25 percent of total crop inputs. The median cost for wheat is $45.88 an acre, soybeans are slightly higher at $48.79, and corn costs were significantly higher at $81.73 an acre.

Greg says each producer should look at their own costs, compare them with the northwestern Minnesota averages, then ask themselves, "where could I cut back, what could I do differently, or maybe I need to add another quarter of land to spread those costs out a little?"

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Bigger or better

Both men emphasize that each farming operation is different, with many factors to consider, so what works for one may not work for another.

"Oftentimes we think the solution is always to get bigger," Greg says. "I'm not saying that's not the answer in some situations because it is in many, but it's not always the answer.

"If you have more acres, you can spread depreciation over more acres, but for every acre you add, you're going to add more fuel, more repairs, more custom hire, and those three represent about 75 percent of the average farmer's machine costs."

In 2003, the researchers collected data on machinery investment, that is the total value of farm machinery divided by the number of acres in that farm operation. According to that survey, the average machinery investment within the Red River Valley was $241, while outside the valley, it was $151.

"In the Red River Valley area, obviously sugar beets, potatoes and edible bean-type producers have a little more invested in equipment," Greg says.

The two men say there's a good reason why data on machinery investment is calculated per acre rather than per bushel.

"In a lot of cases, your machinery expense is going to be the same for a 30- bushel crop as a 60-bushel crop because most of your expense is before the crop even develops," Greg says.

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He adds that yields can vary greatly from year to year because of weather and other uncontrollable factors, which often occur after seeding and fertilizing.

While they're excited about their preliminary results, the brothers say the information will be increasingly valuable in the coming years.

"We have only one year of data, so take it for what it's worth," Greg says. "As we get three, four or five years of data, it becomes more reliable.

"However, I think even from one year of data, we're seeing some pretty important facts come out."

Putting it to use

More data gathered in 2005 compares machine costs for various farm sizes and costs compared with farm profitability.

That research shows a much wider cost variation between small and large corn operations compared with small and large wheat farms. Cost variations for soybeans were somewhere in between.

The profitability chart allows individual producers to see how their per-acre costs compare with highly profitable operations and those with much narrower profit margins.

"One of the key points in managing your machinery costs is really matching your equipment to your size of operation," Ron says.

Greg agrees. "These are obviously sizeable investments, and primarily, we want you to know what your investment is and try to match it to the size of your operation."

Producers who compare their costs and profitability with similar-sized farms in the region should be better equipped to grow their operation with less risk.

"First we have to make sure we're doing as good a job as we can with the acres we're producing," Greg says. "Otherwise, the more we add, the more we could potentially lose."

Helping each other

In addition to connecting with the research data that is available, Greg hopes farmers will open up to their neighbors and friends. He says farmers learn by sharing information and also can reduce costs by working together.

For instance, if a crop is ready for harvest, but a farmer's equipment is tied up elsewhere, the brothers recommend doing what it takes to get the crop in before its quality is jeopardized. In many cases, they say, the cost of custom combining will be less than the amount of revenue lost to quality discounts for grain left too long in the field.

Greg says many farmers are making agreements with their neighbors to help with harvest when timing is tight.

"We got pretty independent for a while, but I think we're starting to see a little more partnering with farmers coming back."

Ironically, the brothers say when working with family, it's important to make those agreements as businesslike as possible.

"The closer the relationship, the greater the need to get it in writing," Greg says.

Tapping into resources

Meanwhile, the Dvergstens encourage producers to make use of resources available through Minnesota's government and educational institutions.

According to the University of Minnesota's Center for Farm Financial Management, more than 100,000 farmers have used FINPACK to evaluate their financial situations and make decisions for their farm's future. The Web site is www.cffm.umn.edu .

Schools within the Minnesota State Colleges and Universities system also offer training through the Farm Business Management Education Program. Statewide, there are more than 100 instructors who can provide individualized on-site instruction at a producer's farm. Information on that program is available at www.mgt.org .

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