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Trends in farm machinery investment in Alberta

Dec. 4, 2012, Stettler, AB - Generally, a farm manager tries to equip their operation to be able to successfully complete all farming operations in a timely manner. At the same time, the farm manager has to ensure that machinery investment is not excessive to the point that it is a financial drain on the farm business. Machinery management is often a balancing act between timeliness of operations and excess capacity. The balance point is a moving target, fluctuating with grain prices and weather conditions.

"Machinery is often the second greatest investment, next to land on most crop based farm operations," says Ted Nibourg, business management specialist with Alberta Agriculture and Rural Development. "This reality underscores the importance of good machinery management. The basis for machinery management is keeping proper records. A good set of records will let you know what the market value of your equipment is and allow you to compare this to your long-term gross revenue per acre.

"Analysing Statistics Canada data for Alberta comparing machinery investment for the years between 1998 and 2011 inclusive, I found that Alberta farmers typically had between 11 per cent and 18 per cent of their total farm capital invested in machinery and it trended downward. During the period of the analysis, machinery investment as percentage of total farm capital declined. Even though the ratio declined, the overall investment increased. In 1998 Alberta farmers had $8.25 billion invested in machinery. This increased steadily to just under $11 billion in 2011. Machinery investment per acre increased in almost a linear fashion from $159/acre in 1998 to $216/acre in 2011. It is important to note that these values are market values and do not reflect depreciation or recapture."

Net operating income as a percentage of machinery investment varied between a high of 22.45 per cent in 2002 to a low of 8.62 per cent in 2003. Net operating income is calculated before machinery depreciation.

An important benchmark for managers to consider is the machinery investment (market value) per acre divided by the long-term average gross revenue per acre. Based on the analysis, this ratio has averaged 1.69 over the long term. This means that the average farmer in Alberta has, on average over the long term, $1.69 invested in machinery for every $1 they receive in gross revenue annually. This ratio climbed from 1.72 in 1998 to a high of 2.29 in 2003. Since 2003, it has declined steadily to a value of 1.06 in 2011.

"One has to keep in mind that good crop returns in recent years coupled with a slackening of investment in machinery compared to total farm investment has resulted in this declining ratio," says Nibourg. "Another reason could be farm consolidation. Producers are spreading their machinery investment over more acres. During the period in question, the average farm size increased by almost one-third."

Using a management depreciation (as opposed to Capital Cost Allowance) rate of 10 per cent, one can see from the long-term average ratio that machinery fixed costs amount to about 17 per cent of gross revenue per acre. If the ratio happens to hit the high mark at 2.29 as it did in 2003 then the fixed cost for machinery amounts to 22.9 per cent of gross revenue per acre. This is the figure that contribution margin has to cover for machinery investment over the long-term. Economists advise farm managers to keep their machinery investment ratio below 2.

"Alberta farmers have done a good job of achieving this bench mark," says Nibourg. "Records for the last five years show that the ratio is well below the long-term average. Now may be a good time for individual farm managers to take a look at the machinery component of their operations, and possibly purchase additional equipment to improve efficiencies, replace existing machinery or upgrade to newer technologies. Keep in mind, however, that the assessment has to be done on an individual farm basis. Don't rely entirely on provincial averages. Also, the machinery investment ratio is a just a guideline. There may be other extenuating circumstances that warrant increasing machinery investment such as weather factors or crop specific requirements."

December 4, 2012  By AARD