How to Evaluate the Financial Advantage of Housing Farm Equipment

Farm Business Management Update, June 2001

By John E. Howe

Housing farm equipment reduces repair costs and downtime and increases the trade-in value. Is the investment in an equipment storage facility justifiable? The financial advantage of equipment storage comes from retained value, lengthened serviceable lifetime, reduced repair costs, reduced operating downtime. The decision to build an equipment storage building and repair shop needs to be evaluated on the costs of the structure compared to the reduced operating costs and retained equipment value gained when equipment is housed. Building costs are based on the initial construction costs, insurance, interest or opportunity costs, repairs, and taxes.

Machinery maintenance expenses are significant cost factors in owning and operating farm equipment, and housing equipment reduces repair costs. Exposure to moisture, freezing conditions, and sunshine all contribute to increased repair costs and reduced serviceable lifetime. Tires, belts, and hoses deteriorate rapidly when equipment is stored outside. Combines, balers and other harvesting equipment, and planting equipment are the most susceptible to deterioration when stored outside and should have storage priority. For example, housing a planter reduces the expected annual repair cost by 2.5% of its initial purchase price compared to 1.5% for a tractor.

Downtime is a critical factor and reduces operating efficiencies. Housing of equipment contributes to the ability to keep equipment operating when field conditions permit operations. Storing equipment inside can reduce downtime by 50%. Equipment housing can reduce the expected downtime from 14.7% of the time for unhoused equipment to 7.6% for stored equipment.

Housing equipment increases the trade-in value of the equipment. Estimates of increased trade-in values for tractors range from 1.6% per year of the purchase price over a ten-year life to 16.5% of the resale price after five years of service.

The value of housing equipment is the sum of the value of reduced repair costs, reduced downtime, and increased trade-in value. Estimates for the annual savings from storage are shown in Table 1.

Table 1. Annual Savings Due to Machinery Storage

	Savings as a Percent of Initial Price, Assuming a 10 year life %
	Greater Trade-in Value	Fewer Repairs	Less Downtime	Total
Tractor	1.6	1.5	1.2	4.3
Combine	2.0	3.5	1.2	6.7
Planter	1.2	2.5	1.2	4.9
Tillage	0.5	0.5	0.6	1.6

Source: Grisso, R. D. and S. R. Melvin. 1996

Storage facilities can contribute to a more efficient farming operation through indirect cost savings and providing alternative storage for farm supplies and protecting them from weather and theft. Indirect cost savings include a more efficient use of labor for on farm repairs and the ability to complete preventive maintenance during the off-season. Cost savings accrue from using available labor to do repair and maintenance work rather than having an outside contractor do this work. Depending on the type of facility, these alternative uses include storage of chemicals, seed, hay and other agriculture commodities. The value of indirect cost savings are hard to estimate, but they may be viewed as a positive factor when considering building an equipment storage building.

Annual equipment storage costs are based on construction costs, interest, real estate taxes, insurance, and repairs. The construction cost or purchase price of the building must be amortized over the expected life of the building. Amortization of the initial building cost can be based on the method used to calculate for income tax purposes or a simple straight-line method over the useable life of the building. Interest or opportunity cost should be based on the loan rate if the building is financed or the expected annual return given up if investing cash. Property tax should be based on the county tax rate. Insurance and repair costs will vary depending on building type and other factors. Insurance cost estimates are best obtained from your insurance agent. Repair costs are difficult to estimate and generally increase as the building ages. It is necessary to provide an annual estimate of repairs when you are considering investing in a new structure. A worksheet for estimating annual building costs is found in Figure 1.

Annual Building Cost Estimate Example

Assume a 2,700 sq. ft. building is being constructed at a cost of $45,000.

Depreciation - 15 years straight line ($45,000 / 15 years) $3,000.00
Interest or opportunity costs at 8% 3,600.00
Property tax at $0.90 per $100 of value 405.00
Insurance and repairs at 1% 450.00
Total annual costs $7,455.00
Cost per square foot ($7,455 / 2,700 sq. ft.) $2.76

How to evaluate the cost advantage of equipment storage

Use the information in Table 1 to estimate the expected annual cost saving and trade-in value increase for each piece of equipment. A tractor with a new cost of $50,000 would have an estimated annual cost saving and trade-in value increase of $2,150 ($50,000 X 4.3%). Similarly, a baler costing $20,000 would have an estimated annual cost saving and trade-in increase value of $1,340. If the annual building cost estimate is less than the sum of the expected annual cost saving and trade-in value increase for the equipment to be stored, storage is justifiable. In this tractor and baler example, the annual storage cost estimate would need to be less than $3,490 to consider housing as a sound option. If storage requirements are 150 square foot for the tractor and 110 square foot for the baler, the total storage requirement for these two items is 260 square foot. Using the costs per square foot from the 2,700 square foot building example, the annual storage cost for the tractor and baler would be $718, well within the justifiable limit of $3,490. Reduced repair costs alone could justify the storage costs. In the tractor and baler example, the repair savings equal $1,450 compared to the expected storage cost of $718. A worksheet to estimate the annual cost savings and increase in trade-in value and comparing these values to the annual building costs is found in Figure 2.

Estimating Storage Needs

The base floor space requirement for each piece of equipment to be housed is the starting point for estimating building size. The base floor space is determined by multiplying the length and width of each piece of equipment. To allow space to maneuver and work around the equipment, the sum of the base floor space requirements should be increased by 15% for a minimum floor space for storage.

The minimum storage space will not provide for any temporary or future storage needs as additional equipment is acquired. Additional storage space would be useful during busy seasons of the year when equipment hitched to a tractor unit can be quickly pulled in out of inclement weather. In addition, future storage needs should be considered and be sure to include space for equipment that may be purchased in the next 3 years. The door size should be two feet wider and one foot taller than the largest piece of equipment that may be housed in the structure. Figure 3 provides a worksheet to estimate minimum storage requirements.

Figure 1: Annual Equipment Storage Building Cost Estimate
	Annual Cost
Interest or Opportunity Cost: ____% (interest rate) X $ ____________ (construction cost)
Property Tax: $ ____ rate/$100 X _______________ (construction cost/100)
Insurance and Repair Estimate: 0.25% to 1.0% of construction costs
Depreciation (20 years straight line): $ _______________ Building Cost / _____ Years
Total Annual Cost (sum of the above 4 items)
Square Footage of the Building: ______ length X ______ width
Cost per Square Foot: Annual Cost / Total square feet

Figure 2: Worksheet to Compare the Expected Savings From Housing Equipment
1	2	3	4
Equipment Item	Initial Price	Savings Factor From Table 1	Savings due to Housing Equipment
Tractor Example	$75,000	4.3%	$3,225
Total of Column 4		No entry
Estimate of Annual Building Costs			(                     )
Expected Savings

Instructions for use:

1. Enter purchase price for equipment in column 2 & Savings Value from Table 1 in column 3.
2. For each equipment item, multiply column 2 times column 3. Enter the results in column 4.
3. Estimate of annual building costs. Use Figure 1 information to calculate this value.
4. Expected Savings: subtract annual building costs from total savings expected in column 4.

Figure 3: Worksheet for Estimating Minimum Equipment Storage Requirements
Equipment Item	Length (feet)	Width (feet)	Square Feet Required
Baler Example	12.5	7.5	93.75
Base Floor Space for all Equipment: Sum of items in column 4
Minimum Floor Space Requirements: Multiply Base Floor Space for all Equipment times 1.15 (example: 93.75 X 1.15 = 107.8 Sq. Ft.)
Adjustments for Seasonal Needs and Future Purchases
Total Estimated Equipment Storage Requirements

References

Grisso, R. D. and S. R. Melvin. 1996. Five Strategies for Extending Machinery Life. University of Nebraska Cooperative Extension Service. http://www.ianr.unl.edu/pubs/farmpower/g1261.htm

Grisso, R. D. and G. R. Bodman. 1995. Estimating Floor Space for Farm Equipment Storage. University of Nebraska Cooperative Extension Service. http://www.ianr.unl.edu/pubs/farmpower/nF226.HTM

Worley, J and W. D. Gavin. 1999. Economics of Farm Storage Buildings. March 1999, The University of Georga Cooperative Extension Service. http://www.ces.uga.edu/pubcd/b1173-w.html

Contact the author at jhowe@vt.edu

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