Additional Repairs and Maintenance on Existing Sprayer: $ 8,000 This included rebuilding wheel motors and continued boom repair Repairs not anticipated on the newer sprayer
Net Custom Work: 1,500 acre Fungicide @ $2.50 & 1,500 ac Preharvest @ $1.50
$ 6,000 Total: $14,000
Al estimates his cost per acre at $4.00. The Net Custom work figure used above is the net additional cost above Al’s Cost. In other words, Al cannot include the entire cost of the custom work in this calculation because there will be a cost associated to Al if he does the work himself.
Carrying Cost of Newer Sprayer Interest: $150,000 @ 4%
Actual Depreciation: $150,000 @ 12% Total
Breakeven Yield Loss= Carrying cost of Newer sprayer –Existing Sprayer –Custom Work
$ 18,000 $ 24,000
= $24,000 -$14,000 = $10,000 or $3.33 per acre
Al Worknoplay had us out for a visit in early April. His local big equipment dealership was in for coffee and managed to lure Al back into the dealership to have a look at a newer high clearance sprayer. Al has an older sprayer that will need significant repairs and maintenance work in the next couple of years. It is a bit short of power, not as comfortable to operate, has a narrower boom and has a small tank, all of which are a barrier to Al covering more acres in any given day. Al normally isn’t one to be addicted to new paint but he fell into a green and yellow trance and was looking for us to confirm his desires or drag him back into reality.
Al is currently farming 3,000 acres in Manitoba with a cereal/ oilseed rotation and relies on the sprayer for preseed burnoff, in-crop herbicide, fungicide on every acre, preharvest applications on 50 per cent of his cereals, and some postharvest spraying if the fall permits. In total, that sprayer covers approximately 9,500 acres in a year.
Given the condition of his existing sprayer, Al has indicated that he is finding it extremely difficult to cover all of these acres, and, going forward, if he keeps the older sprayer, he will need to have half of his fungicide and half of his preharvest acres applied by Aneeda Equity at the local Co-op.
With the newer sprayer, Al can cover all of these acres himself. To evaluate the potential upgrade we used a form of partial budgeting to quantify the difference in cost between his two options and convert that cost into a net dollar per acre figure. Partial budgeting can be used to support many decisions an operation will have to make. Partial budgeting involves comparing income and expenses associated with at least two different scenarios.
Al’s situation shook out like this.
Existing sprayer R & M + Custom work + Per Cent Yield loss = Carry cost of newer sprayer
If we solve the equation for Per Cent Yield Loss, this gives us the yield loss threshold at which the new sprayer will make sense. If a large percentage of yield loss is required, then the older sprayer should be kept; if the yield loss is very small, then write the cheque.
For Al’s farm, which has an average gross revenue of $250 per acre, this represents a yield loss of 1.3 per cent as a threshold. This threshold represents the yield loss that can occur from keeping an older sprayer and running the risk that it breaks down and work is not done or Aneeda Equity doesn’t show up on time. Any loss greater than this, and Al would be further ahead to have a more reliable unit in the yard.
We pointed out that this figure does not seem like much however this threshold is on every acre so a significant loss on one quarter may or may not represent the threshold. We also discussed time, and Al felt that this newer sprayer with a 20′ larger boom, 200 gallons more tank capacity and a gain of 1.5 miles per hour from additional power would result in a 30 per cent increase in capacity.
Other considerations for Al outside of the partial budget include:
Expansion opportunities — There will be cash required to fund the growth rented land or payments for purchased land
Other equipment replacement — If financing will be required, what the farm handle for payments
Potential for custom work. At an expected profit of $1.50 to $2.50 pe acre, Al only needs to cover an additional 5,000 acres to make up the net cost difference in the older sprayer and new sprayer thus lowering the threshold to zero per cent
His son would like to return to the farm. Adding a larger sprayer could provide enough revenue to provide him with a modest job and keep him involved in the farm
In the end, Al decided to purchase the newer sprayer and has arranged to do pre-harvest applications for three neighbours and fungicide for two others making the purchase quite affordable.
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 and 204-825-8443