As you may recall, Al Worknoplay has 4,000 acres of cereals, oilseeds and special crops. The farm has expanded at a moderate rate over recent years and has always done so from a position of strength. Al is in his mid 50s and takes a great deal of pride in the crops he grows and the farm’s performance. Al has a 26-year-old son, Sean, and daughter-in-law, Kate, who have been extremely interested in the farm, but they both work professionally in the local community.
Sean and Kate take holidays from their off-farm jobs to work on the farm for seeding and harvest, but they find it difficult to commit additional time for spraying. Al has historically done the herbicide spraying and used the local crop inputs retailer for custom application of fungicide, insecticide, and pre-harvest dessication.
Last season, both the agronomist and high clearance sprayer operator left the retailer to work elsewhere. Although the positions were filled, Al missed the long term relationship that he had with both previous employees. Not having that relationship proved to be costly for Al. At a critical point in his crops’ development, Al ordered a fungicide application. His field was not inspected by the agronomist and further delayed by a heavy rain combined with a shortage of aerial applicators. His fungicide application on 1,400 acres was over a week late. With an estimated yield loss of 20 per cent, Al figures this delay cost him over $100,000. Al felt extremely helpless and wanted to explore his options to ensure this problem was avoided in the future. The options we explored included:
Work at rebuilding the relationship with the local crop inputs retail.
Obtain a commitment from his neighbour Johnny Cash to do Al’s required custom application with Johnny’s high clearance.
Purchase his own new high clearance sprayer.
Purchase a suspended boom sprayer.
Purchase his own used high clearance sprayer.
OPTION 1: REBUILD THE RELATIONSHIP
Although Al has discussed his concerns with the retailer and will continue to do business there, the reality of turnover in high hour, stressful positions such as agronomists and high clearance operators is a reality that Al does not want to look past or dismiss. The retail owners are of great integrity and have the purist of intentions, but the reality is that they only have the capacity to cover so many acres under certain conditions. At times, they have to make difficult choices. Using the retail as one source of custom application is an option Al wants to maintain, but he does not want to rely completely on one option. The risk and cost is simply too great.
OPTION 2: AGREEMENT WITH JOHNNY CASH
Al has an excellent relationship with his neighbour and large cash crop farmer, Johnny Cash. Johnny operates 12,000 acres and as such, his own high clearance sprayer was a necessity. Johnny does some custom spraying for other neighbours and is currently pushing over 25,000 acres per year through his machine. Similar to the crop input retailer, Johnny is another source of custom application but not likely one that Al could consistently count on any more than he could count on the retail.
OPTION 3: BUY A NEW HIGH-CLEARANCE SPRAYER
When Al considers the capacity to handle a high clearance sprayer of his own, he has to consider three aspects: manpower, capacity to supply water, and most importantly, cost per acre. Cost can be calculated as follows:
Fixed costs per year are interest and investment costs of $10,125 ($225,000 at 4.5 per cent), insurance at $847 and depreciation of $33,750 (the actual change in fair market value) for a total of $44,722. Variable costs per acre are fuel, repair and maintenance at $0.91 and labour at $0.45 for a total of $1,36 per acre. If Al was to operate the high clearance sprayer on just his own acres, his cost per acre would equate to $12.54 per acre, which is an excessive premium over the $5.75 that his retailer charges. If Al was able to cover an additional 8,000 acres, his cost per acre would $5.09 on his own acres and provide a 13 per cent profit margin on the custom acres if he charged the same as his local retail. Al would need to increase his water tendering capacity and probably add an additional part time man to tender water.
OPTION 4: BUY A SUSPENDED BOOM SPRAYER
Al considered purchasing his own suspended boom sprayer and a narrow set of tires for his front wheel assist tractor. Fixed costs per year are interest and investment at $2,250 ($50,000 at 4.5 per cent), insurance at $300 and depreciation at $7,500 for a total of $10,500. Variable costs per acre are $1.32 for fuel, repair and maintenance and $0.49 for labour, giving a total of $1.81.
If the Worknoplays operated this suspended boom sprayer on just their own acres, their cost per acre would be $4.32 per acre. We assumed that the suspended boom sprayer would have 77 per cent of the capacity of a high clearance sprayer.
OPTION 5: BUY A USED HIGH CLEARANCE SPRAYER
Fixed costs per year are interest and investment of $5,625 ($125,000 at 4.5 per cent), insurance of $635 and depreciation of $18,750 for a total of $25,010. Variable costs per acre are $1.18 for fuel, repair and maintenance and $0.45 for labour, for a total of $1.63. If Al was to operate the high clearance sprayer on just his own acres, his cost per acre would equate to $7.88 per acre, which is a significant premium over the $5.75 that his retail charges. If Al was able to cover an additional 3,000 acres, his cost per acre would be $5.20 on his own acres and provide a 11 per cent profit margin on the custom acres if he charged the same as his local retailer. Al easily has the water tendering capacity and manpower to cover these acres. Al is concerned about tractor clearance over some of his crops for preharvest and fungicide with the suspended boom sprayer. The difference in cost per acre is far outweighed by the additional capacity and suitability for the spraying Al anticipates, and so Al has decided to opt for a good used sprayer.
The morale of the story is that with very narrow profit margins, achieving production potential in an efficient manner is critical. Custom work should only be considered cost effective if it allows the farm to complete critical tasks on time and affordably. If the task is not completed on time, it can easily carry with it a larger cost that the investment in the equipment and manpower even if two or three farms need to pool resources to bring costs in line.
Andrew DeRuyck and Mark Sloane manage two farming operations in Southern Manitoba and are partners in Right Choice Management Consulting. With over 25 years of cumulative experience, they offer support in farm management, financial management, strategic planning, and mediation services. They can be reached at [email protected]and [email protected]or 204-825-7392 or 204-825-8443.