1. INTRODUCTION 3 2. COST COMPONENTS 17

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1 CONTENTS - i TABLE OF CONTENTS PART I BACKGROUND 1. INTRODUCTION JUSTIFICATION OF MACHINERY MANAGERIAL APPROACH MACHINERY MANAGEMENT THE MECHANICAL SIDE AN ECONOMICAL APPROACH MACHINERY SELECTION TIME EFFICIENCY MACHINERY EFFICIENCY EXCESSIVE MACHINERY COSTS IMPROVING EFFICIENCY CONCLUSION REFERENCES COST COMPONENTS COST STRUCTURE COST ITEMS COST OF OWNERSHIP OPERATING COST CASH AND NON-CASH ITEMS TIMELINESS COSTS CONCLUSION REFERENCES MANAGEMENT APPROACH THEORETICAL BACKGROUND OBTAINING INFORMATION DECISION PROCESS PRE-CHOICE ACTIVITY 31

2 ii - CONTENTS REASONS FOR INVESTMENTS CHOICE ACTIVITY POST-CHOICE ACTIVITY FINAL REMARKS CONCLUSION REFERENCES 39 PART II PRACTICAL PLANNING 4. MATCHING TRACTORS AND IMPLEMENTS THE PROCESS THE BALANCING EQUATION THE FORMULAE TRACTOR DRAWBAR POWER SELECTING TRACTOR SIZE TRACTOR MATCHING IMPLEMENT MATCHING SELECTING A TRACTOR FACTORS INFLUENCING EFFICIENCY CONCLUSION REFERENCES PLANNING FIELD OPERATIONS MACHINE PERFORMANCE PLANTING AND HARVESTING DATES FACTORS AFFECTING SIZE MACHINERY SIZE FIELD CAPACITY OF FARM MACHINES REQUIRED FIELD DAYS AVAILABLE FIELD DAYS SCHEDULING FIELD OPERATIONS CONCLUSION REFERENCES 83

3 CONTENTS - iii PART III MACHINERY COST 6. MAINTENANCE AND REPAIRS THE PROPER BALANCE WHAT TO MAINTAIN TYPE OF SERVICES SCHEDULING SERVICES CONCLUSION REFERENCES RELATIONSHIP OF COST AND USAGE MACHINERY SIZE RELATIONSHIP OF COST AND USE BACKGROUND METHODOLOGY MODEL STRUCTURE MODEL PARAMETERS MODEL APPLICATION VALIDATION OF THE MODEL DISCUSSION CONCLUSION REFERENCES VALUING MACHINERY OVER TIME CURRENT LIST PRICE PRODUCER PRICE INDEX REMAINING VALUE PERCENTAGE, ECONOMIC DEPRECIATION AND MARKET VALUE VALIDATION OF THE MODEL PURCHASE PRICE AND SELLING PRICE CONCLUSION REFERENCES 135

4 iv - CONTENTS 9. CALCULATING MACHINERY COST CALCULATIONS DEFINITION OF TERMS ASSUMPTIONS TRACTOR COST IMPLEMENT COST COMBINE COST OPERATION COST CROP COST TOTAL COST FUEL COST OF STORAGE SPACE REQUIREMENTS STORAGE AREA MACHINERY RECORDS WHY HAVE RECORDS? WHAT TO RECORD HOW TO RECORD CONCLUSION REFERENCES 157 PART IV REPLACING MACHINERY 10. REPLACEMENT STRATEGIES INFLUENCING FACTORS GENERAL STRATEGIES CONSIDERING THE COST THE REPLACEMENT MODEL CONCLUSION REFERENCES ACQUIRING MACHINERY ACQUIRING OPTIONS OWNERSHIP EXCHANGE WORK 179

5 CONTENTS - v CUSTOM HIRE RENTAL OR OPERATING LEASE FINANCIAL LEASE SELF-FINANCING OUTSIDE FINANCING ANNUITY LOANS REDEEMING LOAN REPAYMENT LOAN COMPARING THE LOAN TYPES ALTERNATIVE FINANCING LEASING ROLLOVER PURCHASE COMPARING THE ALTERNATIVES TAX EFFECTS MARGINAL TAX RATES COST OF CAPITAL INCOME TAX DEPRECIATION RECAPTURING DEPRECIATION DEDUCTIONS FOR LEASES CONCLUSION REFERENCES 198 PART V EFFECTIVE TRACTOR USE 12. FUEL USAGE AND SAVINGS DEMAND FOR FUEL REQUIRED FUEL FOR OPERATIONS FUEL USE FOR FIELD OPERATIONS FUEL USE FOR HAYING OPERATIONS FUEL USE FOR TRANSPORTING OVERALL FUEL REQUIREMENTS UTILIZING FUEL EFFECTIVELY MAXIMUM POWER PARTIAL LOADS OPERATING HINTS FUEL SAVING IDEAS TRACTORS AND OTHER FIELD EQUIPMENT 213

6 vi - CONTENTS OTHER FARM VEHICLES CONCLUSION REFERENCES SETTING UP THE TRACTOR WHEELSLIP WHY WHEELSLIP? OPTIMUM WHEELSLIP MEASURING WHEELSLIP ADJUSTING WHEELSLIP BALLASTING AND WEIGHT TRANSFER CORRECT WEIGHT LEVELS WEIGHT TRANSFER WEIGHT ADDITION ADJUSTING BALLAST CONCLUSION REFERENCES EXTENDING MACHINERY LIFE MACHINERY MAINTANANCE OIL ANALYSIS HOW DOES IT WORK? LOOKING INSIDE THE RESULTS MACHINERY STORAGE ENGINE TUNE-UPS MODIFICATIONS CONCLUSION REFERENCES 242

7 CONTENTS - vii PART VI APPENDIXES APPENDIX I FIELD EFFICIENCIES OF IMPLEMENTS 243 APPENDIX II FORMULAS USED 249 REFERENCES 253

8 viii - CONTENTS LIST OF TABLES TABLE 4.1: FIELD EFFICIENCIES FOR A RANGE OF IMPLEMENTS 48 TABLE 4.2: APPROXIMATE DRAFT OF TILLAGE IMPLEMENTS 49 TABLE 4.3: TABLE 4.4: TABLE 5.1: TABLE 5.2: APPROXIMATE DRAFT OF NARROW POINT DIRECT DRILL TINES IN KGF/TINE POWER CONVERSION FACTORS: DRAWBAR TO PTO ESTIMATION OF FIELD DAYS REQUIRED FOR FARM OPERATIONS PERCENTAGE LOSSES APPLIED TO CROP YIELDS AS PER DATE TABLE 5.3: DISCRIPTION AND CAPACITY OF MACHINERY 73 TABLE 5.4: TABLE 5.5: FIELD OPERATIONS, MACHINERY TO USE, AND DATE OF OCCURANCE FOR CORN FIELD OPERATIONS, MACHINERY TO USE, AND DATE OF OCCURANCE FOR WHEAT TABLE 5.6: SCHEDULING CARD FOR FIELD OPERATIONS 76 TABLE 5.7: ADEQUACY OF MACHINERY CAPACITY 78 TABLE 6.1: TYPICAL MAINTENANCE OF A TRACTOR 95 TABLE 6.2: SERVICE SCHEDULE FOR A TRACTOR 96 TABLE 7.1: TABLE 7.2: COMPENSATING FACTORS FOR DEVIATIONS FROM IDEAL CONDITIONS IN PREDICTING REPAIR AND MAINTENANCE COSTS MAGNITUDE AND DISTRIBUTION PARAMETERS FOR REPAIR AND MAINTENANCE COSTS

9 CONTENTS - ix TABLE 7.3: SPREADING OF TRACTOR REPAIR COST IN RELATION TO USAGE 116 TABLE 7.4: TABLE 8.1: TABLE 8.2: TABLE 8.3: TABLE 9.1: TABLE 9.2: TABLE 9.3: TABLE 9.4: TABLE 9.5: TABLE 9.6: TABLE 9.7: TABLE 9.8: SPREADING OF REPAIRS COST FOR MACHINERY IN RELATION TO USAGE OVER TEN YEARS PRODUCER PRICE INDEX, USA AVERAGE (ALL COMMODITIES) FACTORS FOR CALCULATING REMAINING VALUE PERCENTAGES BY MACHINERY CLASS CROSS & PERRY ADJUSTMENT FACTORS FOR SELECTED MACHINERY CLASSES AND MANUFACTURES SPREADING OF THE INFLATION RATE OVER TEN YEARS AT A RATE OF 3% PER ANNUM CALCULATION OF TRACTOR COST FOR A JOHN DEERE 7510 CALCULATION OF OWNERSHIP COST FOR A JOHN DEERE 7510 CALCULATION OF MAINTENANCE COST FOR A JOHN DEERE 7510 CALCULATION OF TOTAL REPAIR COST FOR A JOHN DEERE 7510 CALCULATION OF IMPLEMENT COST FOR A 3.4 M CHISEL PLOW CALCULATION OF OWNERSHIP COST FOR A 3.4 M CHISEL PLOW CALCULATION OF MAINTENANCE & REPAIR COST FOR A 3.4 M CHISEL PLOW TABLE 9.9: TOTAL MACHINERY COST FOR CORN 148 TABLE 9.10: TOTAL FUEL USAGE AND COST FOR CORN 149

10 x - CONTENTS TABLE 9.11: MACHINE RECORD 153 TABLE 9.12: SERVICE RECORD 153 TABLE 9.13: REPAIRS RECORD 154 TABLE 9.14: FUEL RECORD 154 TABLE 10.1: DETERMINATION OF OPTIMAL REPLACEMENT AGE FOR AGRICULTURAL MACHINERY 168 TABLE 11.1: AMORTIZATION OF AN ANNUITY LOAN 185 TABLE 11.2: AMORTIZATION OF A REDEEMING LOAN 187 TABLE 11.3: AMORTIZATION OF A REPAYMENT LOAN 189 TABLE 11.4: COMPARING ALTERNATIVE FINANCING FOR ACQUIRING MACHINERY 193 TABLE 11.5: ANNUAL TAX DEPRECIATION RATES FOR FARM 195 TABLE 12.1: AVERAGE DIESEL FUEL USE 204 TABLE 12.2: AVERAGE DIESEL FUEL USE FOR HAYING 205 TABLE 12.3: FUEL REQUIREMENTS FOR TRANSPORT. 206 TABLE 12.4: DIESEL FUEL USE ESTIMATION 207 TABLE 12.5: CALCULATION OF TRACTOR COST FOR A JOHN DEERE 7510 TABLE 12.6: INCREASED DRAFT AND FUEL CONSUMPTION BY DOUBLING WORKING SPEEDS WITH A RANGE OF IMPLEMENTS TABLE 13.1: ACCEPTABLE LEVELS OF WHEELSLIP 221 TABLE 13.2: APPROXIMATE WEIGHT REQUIRED BY TRACTORS 224 TABLE 13.3: APPROXIMATE STATIC WEIGHT DISTRIBUTION 225

11 CONTENTS - xi TABLE 13.4: ADJUSTED STATIC WEIGHT DISTRIBUTION 226 TABLE 14.1: ENGINE PROBLEMS PREDICTED WITH OIL ANALYSIS TABLE 14.2: ANNUAL SAVINGS DUE TO MACHINERY STORAGE

12 xii - CONTENTS LIST OF FIGURES FIGURE 4.1: PROCESS OF MATCHING TRACTORS AND IMPLEMENTS FIGURE 5.1: THE PROCESS OF SCHEDULING FIELD OPERATIONS FIGURE 5.2: ADEQUACY OF TRACTOR POWER 79 FIGURE 5.3: IMPLEMENT ADEQUACY FOR PLOWING 80 FIGURE 7.1: EFFECT OF INCREASING MACHINERY SIZE ON MACHINERY COSTS FIGURE 7.2: POWER LAW REGRESSION OF TRACTOR REPAIR AND MAINTENANCE COSTS FOR THE FIRST LIFE FIGURE 7.3: POWER LAW REGRESSION OF TRACTOR REPAIR AND MAINTENANCE COSTS FOR THE SECOND LIFE FIGURE 7.4: LINEAR REGRESSION OF TRACTOR REPAIR AND MAINTENANCE COSTS FOR THE SECOND LIFE FIGURE 8.1: REMAINING VALUE AS A PERCENTAGE OF CUR- RENT LIST PRICE FOR DIFFERENT COMBINES WITH ANNUAL USAGE OF 200 HOURS FIGURE 8.2: ANNUAL DEPRECIATION AS A PERCENTAGE OF PRE-VIOUS YEAR S PRICE FOR COMBINES WITH ANNUAL USAGE OF 200 HOURS FIGURE 8.3: REMAINING VALUE AS A PERCENTAGE OF CURRENT LIST PRICE FOR A DEERE COMBINE ACROSS VARIOUS ANNUAL USAGE RATES FIGURE 11.1: CASH FLOW COMPARISION OF THE THREE MAIN TYPES OF LOANS

13 CONTENTS - xiii FIGURE 11.2: INTEREST COMPARISION OF THE THREE MAIN FORMS OF LOANS 191 FIGURE 12.1: DIESEL FUEL DEMAND FOR FIELD OPERATIONS 202 FIGURE 12.2: GASOLINE DEMAND FOR FIELD OPERATIONS 203 FIGURE 12.3: TYPICAL TRACTOR FUEL CONSUMPTION MAP 209 FIGURE 12.4: ADJUSTED TRACTOR FUEL CONSUMPTION MAP 211

14 xiv - CONTENTS PREFACE In my capacity as consulting agricultural economist, I have confronted many farmers with the high levels of their machinery repairs. While looking down the barrel of the gun, they responded by asking me what they should do to reduce this expenditure. As we argued about it, I started to realize that reducing machinery repairs is not as simple as cutting back on fertilizer, using less laborers or buying pest resistant seed instead of using pesticides. I finally had to give in to the farmers and admit that there is nothing they can do about the high machinery repair cost, for the moment that was. Defeated but not conquered, I started doing some research on machinery cost. It was fine for the farmers to beat me in the first set but I new all along that they are going to loose the match against their tractors if we don t find a solution. It is simply not sustainable to accept the high and ever increasing cost of machinery repairs as a given fact. There must be an economical way to manage machinery. So, after several years of research, reading, calculations and putting it all on paper, you are hopefully holding the answer to this problem in your hands right now. Machinery cost is very complex. It is firstly a decision involving the timeliness of operations and secondly a decision with an outcome that should last for a long duration. There is ownership cost as well as operational cost involved. The smaller the machinery set the harder it is going to work, causing repair cost to increase. The bigger the machinery set, the higher the ownership cost will be, resulting in more interest on borrowed funds to be paid. This book then is about: Introducing the reader to the different cost and management components of agricultural machinery; Discussing the practical planning of machinery operations in order to find the optimal machinery set; Determining the optimal size of the machinery to complete the operations in an optimal time frame; Describing the relationship between machinery use and machinery cost; Calculating the eventual point in time for replacing used and obsolete machinery and discussing how to finance this replacements; Suggesting practices that will increase the effective use of tractors.

15 CONTENTS - xv Machinery management must contribute to total management in a cost effective manner. There are a number of strategies to follow that will enable the farmer to achieve maximum life from his machinery. A combination of practices can have a large impact on costs, improve machine reliability for many years to come and finally, increase profit margins. I would like to thank the many agricultural economists and agricultural engineers around the globe who put a lot of effort in compiling research papers and extension documents over many years about the topic of machinery management. I have used a lot of their information in this book and although I gave the proper recognition in the references, I cannot give enough acknowledgement to their hard work. Without your work and the availability of your documents, it wouldn t be possible to write this book. I hope the effort that was put into this book will help the reader to understand the complexity of agricultural machinery management better. May this knowledge help you to manage your machinery the economic way. Philip Theunissen Bethlehem South Africa August 2002