Farm Machinery: Time to Start Asking Questions

For many arable farmers, 2024 was a year to forget, with poor finances, inflated machinery prices and low confidence causing many businesses to ask themselves hard questions when thinking about replacing or investing in farm machinery.

When looking at Agriculture and Horticulture Development Board (AHDB) Farmbench data, on arable farms, total machinery and equipment costs typically represent 35 -39% of total overheads (fixed costs). Machinery costs are significant and are continually rising, so what are some of the key questions we need to be asking ourselves as farmers before reaching for the cheque book? 

Are My Machinery Costs too High? 

A good place to start is to look at your most recent set of farm tax accounts. A gross output analysis is a very useful exercise. It is simply a way of expressing your costs as a percentage of the total gross output of the business. This exercise is a great place to start and provides a broad insight into the costs of the business and helps gauge how much profit is potentially available for reinvestment. 

When completing a gross output analysis, power and machinery costs are usually lumped together, to include costs such as equipment depreciation, fuel, repairs, maintenance, machinery lease charges, contractor fees and electricity.  The target for total machinery and power costs is 15 -18% of gross output.  

Rent and finance costs are normally lumped together, with a target cost of <15% of gross output. This will include all rent and finance costs, including interest from hire purchase agreements, loans and interest. 

In the above example, the total machinery costs of the business are significantly higher than the target, suggesting that further investigation is warranted. Despite the high machinery and power costs, the business is generating a Net Profit which is greater than the target of >15% and is available for paying off existing commitments or potentially available for reinvesting back into the business.

How Do My Machinery Costs Compare to Others? 

The next step is to assess individual enterprises in greater detail. The ADHB Farmbench tool allows you to allocate your costs to specific enterprises (including livestock) and compare against other farms for a specific year. It is a great way of assessing machinery related costs for a given year against a given enterprise. 

 

In the above example, the machinery and equipment costs for the winter wheat enterprise are less than the middle 50% benchmark for Scotland. The total finance costs associated with the winter wheat enterprise is low. 

Why Does Any of This Matter? 

Ultimately, understanding our existing financial position and business costs encourages us to start asking ourselves those difficult questions, which include: 

• Is profit available for reinvestment? 
• Is my farm over mechanised? 
• Is my system too complicated? 
• Could there be an a more cost-effective way of doing things? 

What Is My Plan?

When it comes to machinery, most arable farms will use a combination of owning, hiring, using contractors and sharing with neighbours. Therefore before replacing or investing in a new piece of equipment, it is important to think about which is the best option for your scenario. Costs which should be considered when making comparisons will include interest or finance payments, depreciation, fuel, repairs and availability of labour. 

Ultimately, before deciding to purchase a new piece of machinery, it is important to ask  the questions: 

• Is the piece of machinery vital to the business?
• Can it pay for itself over its lifetime on the farm? 

With any piece of machinery owned, it is helpful to have a farm machinery replacement policy. Although this shouldn’t be set in stone, the danger is that pushing replacement dates back could mean that you find yourself in a position where several pieces of machinery need to be replaced in the same year. Generally, machinery replacement plans should work of a 5-year cycle for tractors, however simple machines such as a plough might be kept for up to 15 years, depending on how often it is used. 

Old machines which are out of warranty are obviously the highest risk and if maintenance costs are higher than a replacement or the cost of using a contractor, then you should think about either replacing or getting rid of the machine. 

What Impact Does My Plan Have on Cashflow? 

It is important to think about the impact that any new investment or change to machinery policy will have on your cash flow. Purchasing a piece of equipment outright, using a hire purchase agreement, hiring a piece of equipment or using contractors, will all have an impact.   

The importance of thinking about and managing cashflow has been emphasised by English farmers who last year took part in Defra’s Farming Equipment and Technology Fund (FETF). The scheme has allowed arable farmers to invest in new machinery, however with claims taking 30 days or more, for reimbursed funds to land back into business accounts, this has presented problems on some farms, where the expenditure has also coincided with a hefty feed or fertiliser bill. 

There is no one size fits all approach to machinery. What is right on one farm will not necessarily be right for another. It is important to remember to seek help when making decisions on farm. Funding is available through the Farm Advisory Service (FAS) to help you with decision making. For help please refer to the FAS website. 

At SAC Consulting, we have a range of tools available to help you with completing financial calculations, budgets and cash flows. You are not alone! 

5 Top Tips  

1. Start by getting to grips with your current business and machinery costs. 
2. Ask yourself if that piece of equipment is really needed or does it sit in the shed for 11 months of the year?  
3. Before replacing a piece of equipment, think about other options, including using contractors or sharing the cost of a piece of machinery with a neighbour. 
4. Have a replacement policy. Try not to let replacement become urgent!   
5. Review your business annually and don’t be afraid to ask us for help! 

Useful Links 

• ahdb.org.uk/machinery-costing-calculator 
• www.fas.scot/publication/getting-started-in-arable-agriculture-machinery-appraisal 

George Gauley, Consultant, George.Gauley@sac.co.uk

Unearthed is the exclusive SAC Consulting members' monthly newsletter. Unearthed offers insights and tips from our experts on what we think is in store for farming and crofting in the coming months in order to protect and enhance your business.

Posted by Unearthed News on 13/02/2025