You also may want to compare the costs of purchasing hay with producing your own hay. In some markets, it may be cheaper to buy someone else’s hay and use your own forage for additional grazing. Finally, knowing your harvesting costs is critical for a custom operator who wants to be profitable over the long haul.
In this article, straightforward methods for calculating hay harvesting costs are presented, including an Excel-based calculator developed for this purpose. Next, a partial budgeting approach is used to systematically compare hiring a custom operator versus harvesting the hay with your own equipment and to compute break-even hay yields and hay prices.
Calculating hay harvesting costs for your operation
Variable costs
In order to calculate your variable costs (also known as operating costs), you will need to keep track of costs such as fuel, repairs, operating hours, labor hours and twine. You may want to start with a typical budget for your area and adjust it to reflect your own operation.
An excellent resource for finding crop budgets for your area is the USDA-NRCS State Ag Econ Information Sources, which you can find via an internet search or at this shortcut (State agricultural economic information sources).
In this article, an excellent extension resource originally developed by Texas A&M is used to calculate fixed and variable hay harvesting costs and compare results under various yields.
Estimating ownership costs for hay harvesting equipment
Unlike variable costs, ownership costs (also called fixed costs) for machinery usage do not vary with levels of use. They do vary considerably by producer to a much greater extent than variable costs. Ownership costs include depreciation, property taxes, housing, interest and insurance.
Depreciation represents the value of the machinery lost each year due to age, use and obsolescence. Although it’s a non-cash cost, depreciation can be a considerable expense on an annual basis given the high cost of machinery. Here, we will be using straight-line depreciation, which is appropriate for accounting and management purposes, calculated as follows:
Annual Straight-Line Depreciation = (Current Market Value - Estimated Salvage Value) / (Remaining Years of Life)
When calculating depreciation, you will need to estimate the useful life of the machinery in years as well as its value at the end of this period. Using current market values for your machinery will help you determine up-to-date costs of using your equipment.
Other fixed costs include property taxes, housing, insurance and interest on invested capital. These costs are estimated using the average annual value of your machinery investment, calculated by computing the average of the purchase price and your estimated salvage value as follows:
Average Machinery Investment (AMI) = (Purchase Price + Salvage Value) / 2
Property taxes may or may not be assessed on your farm machinery, depending on your state of residence. Annual assessments would typically be in the range of 1.5 percent of average machinery investment. Annual housing costs for machinery typically range from 0.5 percent to 1.5 percent of the average machine investment.
Even if machinery is not housed, a charge should be assessed to reflect additional wear and tear from sitting out in the weather. Insurance rates are also assessed based on average machine investment, typically at a rate of 0.5 percent for equipment for off-road equipment. In this example, we will ignore these relatively small fixed costs.
An annual interest cost on invested capital is also calculated based on average machine investment by simply multiplying this value by the annual interest rate. This interest charge reflects the fact capital is tied up in machinery and cannot be used for another purpose. An opportunity cost on invested capital is calculated for all machinery, regardless of whether it is completely paid for or not.
Cost calculator
A cost calculator developed by faculty at Texas AgriLife Extension and Oklahoma State University makes it easy to calculate hay harvest costs and compare them to custom harvesting costs. You can adjust various parameters, including acreage, yield, number of cuttings and machinery values (see Figure 1).
Click here or on the image above to veiw it at full size in a new window.
Assuming 100 acres of hay are harvested in two cuttings, with a total yield of 3 tons per acre, this study compares hay harvest and hauling costs, including changes in capital ownership, to custom harvesting and hauling. Changes in capital ownership reflect the fixed ownership costs of depreciation and interest (as an opportunity cost of capital).
Given that this is a small haying operation, with just 100 acres, the machinery complement is relatively low-cost (Table 1) and not all of it is completely dedicated to hay harvesting or hauling.
Using the formulas described above, annual ownership costs for all of the hay harvesting and hauling equipment are calculated in Table 2.
Operating costs include labor, valued at $15 per hour, fuel, repairs, miscellaneous costs (including twine) and a $500 annual management charge.
Table 3 presents annual operating costs and sums both operating and fixed costs in the final column. Using these assumptions, total annual machinery costs for this 100-acre hay operation are just over $20,000 or approximately $200 per acre.
Next, owner-operator costs are compared to typical custom charges, assuming the custom operator receives half the hay in payment for harvesting and hauling. In this example, hay is valued at $120 per ton, and the yield is estimated at 3 tons per acre in two cuttings, so the custom charge would be $180 per acre or $18,000 total.
This charge is less than the total machinery costs presented in Table 3 – but only by about 10 percent. What if yields or prices differ from these assumptions? To answer this question, we will calculate break-even values.
Using a partial budget analysis to calculate break-even values
A partial budget simplifies a budgeting analysis by only examining those cost and return factors that change. It can only be used to compare two alternatives. A partial budget analysis is basically a benefit-cost analysis in which you systematically list average annual changes in benefits (increased returns or reduced costs) and costs (decreased returns or increased costs).
In this case, the total costs of hay harvesting and hauling by the owner-operator were estimated at $20,056 for the 100-acre hay operation. The additional costs of using a custom harvester, at $18,000 per year, are compared to the benefits of not spending an estimated $20,056 per year to harvest your own hay. Given these values, it appears using a custom harvester would save $2,056 per year.
But how confident are you in these numbers? What if your hay price or yield assumptions are incorrect? What about fixed machinery costs? Some of those costs would remain or be allocated differently for equipment used in other operations.
If you are using a spreadsheet to calculate these numbers, it is easy enough to examine the sensitivity of your results to the underlying assumptions. If you want to calculate specific break-even values for some of these parameters, some simple algebra will suffice. For example, you can calculate the break-even price for hay that would make it more profitable to continue to harvest it yourself as follows:
1. Set custom fees based on half of the hay revenue equal to the owner-operator costs of harvesting hay
(price)(yield)(50 percent) = $20,056
2. Solve for price as follows:
(price)(300 tons)(50 percent) = $20,056
(price)(150 tons) = $20,056
(price) = $134 per ton
You can calculate the break-even yield for hay that would make it more profitable to harvest it yourself similarly:
1. Set custom fees based on half of the hay revenue equal to the owner-operator costs of harvesting hay
(price)(yield)(50 percent) = $20,056
2. Solve for yield as follows:
($120)(yield)(50 percent) = $20,056
($60)(yield) = $20,056
(yield) = 334 tons
These calculations show your break-even values are within 11 to 12 percent margin of your assumptions. Depending on how confident you are in your original assumptions, this change may be too risky for your preferences.
Another area that may be worth examining more closely are the changes in annual capital ownership costs in moving to custom harvesting. If you sell your hay harvesting equipment, then you wouldn’t have operating or ownership expenses, but if you keep your equipment, you will still have ownership expenses. You may want to compare just the annual operating expenses of $13,780 to custom fees.
A custom charge of $18,000 is $4,220 more than the annual operating expenses, in which case it would be more profitable to harvest your own hay. Break-even values for the hay price or hay yield above which it would be more profitable to harvest your own hay would then be $92 per ton and 230 total tons.
As a producer, you may feel quite confident your price and yield will be above these break-even values; thus, it is highly likely it will be more profitable to harvest your own hay.
This same approach could easily be adapted to different custom fee arrangements, such as an acreage or per-bale value. Other adjustments can easily be made in the cost calculator as well, such as assumptions on machinery values. Knowing your bottom line for harvesting hay is a valuable asset for any hay producer and will put you ahead of producers who do not know their harvesting costs.
One final note on harvesting your own hay versus hiring a custom operator. The reliability (and availability) of your custom harvester is critical for ensuring your hay is cut, baled and picked up in a timely manner so the quality of your hay is as high as possible. This last variable may well explain what appears to be non-economic behavior by ranchers who insist on harvesting their own hay and owning their own equipment. 
References omitted but are available upon request. Click here to email an editor.
-
Kathleen Painter
- Agricultural Extension Educator, Boundary County
- University of Idaho
- Email Kathleen Painter
