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![]() Dec. 12, 2024
By Nick Paulson and Gary Schnitkey, Department of Agricultural and Consumer Economics, University of Illinois and Carl Zulauf, Department of Agricultural, Environmental and Development Economics, Ohio State University Machinery costs on Illinois grain farms have increased through time. Costs increase more rapidly during high income periods as producers make machinery investments and manage their taxable income. The current, low-return environment has farm businesses seeking cost reduction strategies. Appropriately sizing the operation's machinery complement and delaying unnecessary capital purchases will help preserve financial resources during low return periods. Lower per acre power costs are also positively associated with more profitable farms. But, machinery cost management is a continuous process, not a one-and-done decision. Machinery Costs through Time University of Illinois crop budgets and historical returns, which rely on information from cooperating farmer members of Illinois Farm Business Farm Management (FBFM), include a power cost category which has components associated with a farm's machinery and equipment. In today's article we use a subset of power costs that we define as machinery costs. Machinery costs reported here include machinery hire and lease, repairs, fuel and oil, and economic depreciation. Figure 1 shows average machinery costs per acre for corn production on FBFM grain farms in central Illinois from 2003 through 2023, with current projections for 2024 and 2025. Fuel and oil costs have also trended up but have shown both annual increases and decreases reflecting the variability in energy prices. Since 2003, FBFM has used economic depreciation, in most cases calculated with the 125% declining balance method assuming a 10-year useful life and no salvage value (see farmdoc daily article from March 19, 2021). Thus, changes in depreciation costs over time are directly linked with the capital purchases made by farmers. Purchases of machinery will increase depreciation costs, and those increases will persist for multiple years. Depreciation costs on FBFM farms increased more rapidly from the mid-2000s through 2015. This resulted from larger capital purchases driven by higher farm incomes and changes to the tax code that allowed more of the machinery purchase price to be deducted in the year of purchase. From 2015 to 2019, depreciation costs flattened out as capital purchases were reduced during the lower income years. Depreciation costs then increased at a faster rate again during the higher income years from 2020 to 2023. USDA Prices Paid Indexes Figure 3 shows the prices paid indices for machinery, fuels, and repairs as reported by the USDA. Each price index is normalized to 2003 (i.e. value is 100 for all three indices in 2003). To read entire report, Click Here.
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