November 12, 2001
BENCHMARK MACHINERY VALUES ON GRAIN FARMS
Machinery costs represent a significant proportion of total costs on grain
farms. Machinery depreciation, machinery repairs, fuel, machinery hire and leasing,
utilities, and light vehicle expense account for an average of 16 percent of the
total economic costs on grain farms enrolled in the Illinois Farm Business Farm
Management (FBFM) Association. There also is considerable variability in machinery
costs across farms, with more profitable farms tending to have lower per acre
machinery costs (see Illinois Farm Economics: Facts and Opinions. "Do Some
Farms Consistently Have Higher Profits than Other Farms?" FEFO
01-15, July 20, 2001).
Farms with higher machinery costs may have higher machinery values. This paper
reports benchmark machinery values for grain farms of different sizes. A farmer
can compare his machinery values to the benchmarks presented in this paper to
determine whether machinery values are high or low. Having high or low machinery
values does not necessarily indicate that a farm has a problem with machinery
costs. However, having either high or low machinery values suggests that a farmer
should evaluate his machinery practices.
Data for the benchmarks come from farms enrolled in FBFM. To be included in
the benchmarks, a farm had to receive the majority of revenue from grain operations
and had to have balance sheet data that included a fair market valuation for machinery.
In addition, the farm had to receive less than $20 per operator acre from custom
work. This criterion eliminated farms that perform a large amount of custom work.
A total of 1,682 meet the above criteria and are summarized in this paper.
Machinery includes all tractors, combines, planters, drills, and tillage equipment.
It also includes grain hauling equipment such as grain carts and trucks. Machinery
also includes pickups and other light duty trucks that are used in the farm business.
Fair Market Values
The fair market value (FMV) of machinery represents an estimate of the amount
of money a farmer would receive if all machinery is sold. Estimates of FMVs are
somewhat subjective. One individual could assess the FMVs of a farm's machinery
dramatically different than another individual.
Figure 1 shows a scatter plot of the FMVs for the 1,682 grain farms enrolled
in FBFM. Each point represents a farm's FMV, with the FMV indicated on the vertical
axis and tillable acres denoted on the horizontal axis. The line labelled "average"
shows the trend in FMVs as tillable acres increase.
The average line in Figure 1 suggests that FMVs increase as tillable acres
increase. On a per acre basis, however, average FMV declines as tillable acres
increase. This trend is shown in Figure 2 which shows per acre machinery values.
For an 875 acre farm, the median FMV is $218,750, or $250 of FMV per tillable
acre. At 1,350 acres, the FMV is $236 per acre, $14 per acre less than the FMV
for the 875 acre farm.
There is considerable range in FMVs such that a larger farm will not necessarily
have a lower per acre FMV than a smaller farm. Table 1 quantifies the variablity
in per acre FMVs. Each row of Table 1 shows a row of farms and breakpoint per
acre FMVs for different percentages. Take for example, the 751 to 1,000 acre farm
size category. The break point at a 5 percent level is $97 per acre. This means
that 5 percent of the farms have FMVs less than $97 per acre while 95 percent
have FMVs above $97. Further breakpoints for the 751 to 1,000 size category are
$168 per acre for the 20 percent level, $209 per acre for the 35 percent level,
$250 for the 50 percent level, $279 for the 65 percent level, $332 for the 80
percent level, and $416 at the 95 percent level.
Comparisons of a farm's own FMV to those in Table 1 will show
a farm's relative position in FMV among farms. Take, for example, a 1,200 acre
farm that has a $165 per acre FMV. This farm's FMV is between the 20 percent breakpoint
of $157 per acre and 35 percent breakpoint of $202 per acre for farms between
1,001 and 1,500 acres. This means that somewhere between 20 and 35 percent of
the farms have lower per acre FMVs than this farm. This farm has lower costs than
the majority of similarly sized farms summarized in Table 1.
Table 2 shows per acre machinery cost values. Cost values equal the sum of
the adjusted taxable basis for each piece of machinery owned by a farm. Hence,
a farm can sum the adjusted tax basis of all machinery and then divide by the
number of tillable acres to arrive at a per acre cost value. This value can be
used to find a farm's rank in Table 2.
Cost values are much lower than FMVs because depreciation schedules
for income tax purposes generally result in a quicker write-off than their actual
drop in FMV. In addition, using the section 179 expense election magnifies this
A significant portion of farms have no cost value, indicating that their machinery
is completely depreciated. This is particularly true for the smaller tillable
acre categories. In the less than 500 acre category, the 5 percent breakpoint
is $0, indicating the 5 percent of the farms have $0 taxable basis in their machinery.
Comparing FMVs and cost values to breakpoints in Tables 1 and 2 will indicate
whether a farm has high, average, or low values. Having high values may indicate
that a farm has relatively high costs. These high costs can result from having
too much equipment on a farm, having too large of equipment on a farm, or trading
equipment too often. Having low values also may indicate cost difficulties. These
farms may have older equipment that results in high repair costs.
However, these comparisons are only suggestive. A farm can also compare machinery
cost to determine whether costs are high. Machinery cost benchmarks are provided
in Illinois Farm Economics: Facts and Opinions, "Per Acre Machinery Costs
on Illinois Grain Farms," FEFO 01-09, April 17,
Issued by: Gary
Schnitkey, Department of Agricultural and Consumer Economics