Introduction
My assignment for this conference is to help you to answer a critical economic question:
"If I want to direct seed or no til, should I buy, rent, custom hire, or joint-venture with a 3rd party?"
Before addressing this question, I was asked to briefly discuss our experiences with no-til or direct seeding. I will begin by reviewing the mission of our farm, and describe how direct seeding contributes to the basic goals of our farm…
As stewards of this farm, our mission is to produce high quality grain, livestock and timber raw commodities for U.S. and foreign customers in a manner that will assure:
--a fair rate of return on invested resources to our owners,
--a safe and fulfilling environment to work and live in, and
--a farm capable of producing sustained income for future generations.
We are very interested in direct seeding, because we feel it is making a major impact on our ability to achieve our mission and remain a SURVIVOR in agriculture.
Goals - Impacts of Direct Seeding
IMPACT: increased quality of life, higher return on invested resources
IMPACT: sustainable income for future generations
I don't need to dwell on the importance of Direct Seeding... you are all probably bored by now with no-til pictures and success stories. So, I will hit a few quick points on our experiences and then get to my assigned topic.
WFI history/evolution to direct seeding
- WW, SW/SB, Pulse, WW, Oilseed
Haybuster, Palouse Zero Til, JD 750, Flexi-Coil and JD air seeder
(Slide captions) - no til fields: Sp’ 98 Peas with Sp Durum in Background; spring rape; WW-on AW Peas-minimum til compared to WW-Notil into Sp canola; AW Peas Notilled into Sp Durum
Direct Seeding Results
Biggest concerns
Now back to the question:
"Should I buy, rent, custom hire, or joint-venture with a 3rd party?"
Several Important Considerations:
Let’s examine the first consideration…. Optimum Financial/Economic Decision
The academicians would tell you the answer is simple: Just pull out your old college ag econ notes and do a Breakeven analysis using marginal costs, marginal revenues and all that jazz…..RIGHT. Show BEP graph….(Custom Rates, Table 1, page 2)
Concept is simple. The CHALLENGE is: "How do we laymen apply this theory without a PHD in finance? All kinds of drill costs and configurations and no two farms alike in size or finances.
….(Story:… Father dies, leaves 17 cows to 3 sons in his will) …
To apply this concept we need to have some facts and make some assumptions that fit our own operation….then we need an analytical tool to crunch the numbers. Fortunately, some very talented individuals have already done this for us. I will illustrate several examples during the remainder of this presentation. Much of this information was developed using techniques described in the following sources:
Before I go into Buy vs. Rent vs. Custom Hire, I want to take a short detour and look at costs per acre for some typical tillage operations comparing CONVENTIONAL VS. DIRECT SEEDING systems.
Table 1 - Selected Custom Rates for typical tillage operations
| Tillage Operation |
|
Average |
| Shank in fertilizer | $7.50-11.58 |
$9.03 |
| Moldboard Plow | $5.00-15.00 |
11.00 |
| Chisel Plow | $5.00-$10.00 |
$7.00 |
| Disk | $$6.00-7.50 |
$7.00 |
| Cultivate | $5.00 |
$5.00 |
| Harrow | $2.00-5.00 |
$3.50 |
| Conventional Drill | $5.00-8.00 |
$6.60 |
| No Til Air Drill | $20.00-25.00 |
$22.50 |
Table 2 - Costs/Acre - Minimum Tillage - WW on Pea Ground
| Operation | Cost/Acre |
| Rip in Fertilizer |
$9.00 |
| Culti-weed |
5.00 |
| Seed + Dry Starter-Conv Drill |
12.00 |
| Total Cost Per Acre |
$26.00 |
| vs. Custom No Til |
$22.50 |
Table 3 - Costs/Acre - Conventional Seeding - Spring Peas
| Operation | Cost/Acre |
| Fall Plow |
$11.00 |
| Spring Harrow |
3.50 |
| Spring Cultivate |
5.00 |
| Cultivate/Spray Incorporate |
5.00 |
| 2nd Incorporate-Cultivator |
5.00 |
| Seed-Conventional Drill |
10.00 |
| Harrow |
3.50 |
| Roller/Packer |
3.00 |
| Total Costs Per Acre |
$45.50 |
Table 4 - Costs/Acre - No-til Seeding System - Spring Peas
| Operation | Cost/Acre |
| Fall Harrow stubble |
$3.50 |
| Sp Harrow - Granular Chem Application |
5.00 |
| Seed No Til |
20.00 |
| Harrow (Optional) |
3.50 |
| Roller/Packer |
3.00 |
| Total Costs Per Acre |
$35.00 |
CONCLUSION: It is often cheaper to no til rather than conventionally seed, even if we have to custom hire the job done.
Now, back to the question…."Should we custom hire, rent, or buy the drill?" To address this question, we first need to look at the component costs associated with each of these options:
Ownership Option
Rental/Lease Option
Custom Hire
Now let’s look at some real life examples illustrating owning vs. renting. For illustration, let’s use a JD 750 15’ No Til Drill. Table 5 below contains assumptions needed to compare these options:
| Purchase Option | |
| Purchase Price | $53, 750 |
| Down Payment (30%) | 16,125 |
| Loan Repayment Period (yrs.) | 5 years |
| Annual Payments (10.15% interest) | $9,963.44 |
| Salvage Value - 5 years | $22,500 |
| Lease Option | |
| Lease Length | 5 years |
| Annual Lease Fee | $11,854 |
| Short Term Rental Option | |
| Rental Fee ($/acre) | $14.00 |
| Annual acreage seeded | 800 acres |
Task #1 - Calculate the breakeven or threshold level for owning vs. renting the drill.
Solution #1 - Simple Formula Method - Break-even Analysis
Break-even Acreage = Annual Ownership Costs____
Custom Rate/Ac - Operating Costs/Ac
Annual Costs = depreciation, interest, taxes, insurance*, and housing
= $6,450 + $3,870 + $572 + 0 + $0
= $10,892
Rental rate/acre = $14/ac Operating Costs (Maintenance) = $3/ac
Break-even Acreage = _$10,892_ = 990 Acres
$14 - $3
* Insurance costs of $197 not included, as this is a common cost of own, rent or lease
Task #2 - Assuming an annual usage of 800 acres, compare the cost of purchasing, leasing, and renting the drill taking into consideration different times values for annual cash inflows and outflows. (Refer again to the basic cost data related to each option in Table 5)
Solution #2 - Use computer model that projects after-tax cashflows for each option and discounts to a net present value.*
* (Program software for capital asset analysis program is called BUYORLEA Vs. 2 available from WSU, Dept C, PO Box 645912, Pullman, WA 99164-5912 at a cost of $25 payable to WSU.)
(Optional: Scan in Tables showing detail of after-tax outflows each year)
Table 6 - Present value of after-tax cash outflows for no-till drill financing alternatives.
| Alternative |
PV-After Tax Outflows |
| Purchase |
|
| Long-Term Lease |
|
| Short-Term Rental |
|
Custom Hiring - When is it appropriate?
…You can often make a strong argument for pairing up with someone who can shorten your seeding season, particularly when weather problems narrow up seeding windows.
Other Applications - Determining "Own vs. Rent" Threshold Levels
Table 7 - Costs per hour to Operate 30’ Level Land Combine - $177,000 new cost in 1996
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Table 8 - Costs per hour to operate 330 HP Rubber Track Caterpillar Tractor
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(Show alternative analyses with used equipment and actual cost figures to demonstrate how Breakeven Threshold levels can change – no til drill, tractor purchase). Stress importance of using professionals (accountants, extension, consultants, etc.) to help analyze economics of OWN vs. RENT vs. Custom Hire. Look at dollars at stake….
Optional Issues
Joint Ventures/Partnering Situations
Potential Equipment Trade Areas – best fit is when cooperative approach improve economic feasibility or lowers cost of production compared to independent efforts
Setting Up Joint Arrangements
Issues to Cover in Agreements (9-10 issues, mostly common sense)
Fair Market Rental Value Issues
Summary and Conclusions:
Dwdspro.doc