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Source: U of Illinois news release

To view the complete report, click here.

With tightening margins and greater amounts of uncertainty, producers are looking for ways to cut costs. In this article, we will look at power and equipment costs components, how they vary by farm size and the impact on profitability.

In 2003, Illinois Farm Business Farm Management (FBFM) changed depreciation methods. Before 2003, tax depreciation was used to determine machinery depreciation. Because tax law now allows large write-offs in the year of purchase, economic depreciation was adopted in 2003. Depreciation of most farm machinery is determined using a ten-year 125% declining balance with a salvage value of $0. Bonus depreciation or expense elections claimed for tax purposes are not included in economic depreciation.

Summaries of FBFM records indicate that power and equipment costs on Illinois grain farms average $146.30 per tillable acre in 2019. Power and equipment costs are composed of utilities ($7.08), machinery repairs ($32.03), machine hire and leases ($19.87), fuel and oil ($20.24), light vehicle ($2.09) and machinery economic depreciation ($65.00). This total cost compares to 2010 when the total power and equipment cost per acre was $108.63. Figure 1 shows the breakout of the parts of power and equipment costs from 2005 to 2019 per tillable acre.

In Figure 1, we see that in 2008 economic machinery depreciation began to accelerate more than the other components of power and equipment costs. The acceleration was due to increased incomes as well as increased expense election limits for tax purposes. Farmers were purchasing equipment to utilize the expense election to have current tax deductions. Since 2014, economic depreciation has lowered off as less annual capital purchases were being made. Also in 2014, fuel and oil costs decreased and have maintained that lower level for the last five years.

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