FEASIBILITY OF MACHINERY COOPERATIVES IN THE SOUTHERN PLAINS REGION. Garret Long. Phil Kenkel*

Transcription

1 FEASIBILITY OF MACHINERY COOPERATIVES IN THE SOUTHERN PLAINS REGION Garret Long Phil Kenkel* Selected Paper, Annual Meeting, Southern Agricultural Economics Association, Mobile, Alabama, February 4 7, *Graduate Student, Professor Department of Agricultural Economics, Oklahoma State University

2 FEASIBILITY OF MACHINERY COOPERATIVES IN THE SOUTHERN PLAINS REGION Garret Long Graduate Student Phil Kenkel Professor ABSTRACT This is a comparison of machinery ownership costs for individuals and cooperatives. By looking at various complements of equipment we can see the potential for cost savings through machinery cooperatives. Specifically these savings can be seen in farming operations that require higher capital investment, such as in no till operations. Copyright 2007 by Garret Long and Phil Kenkel. All rights reserved. Readers may make verbatim copies of this document for non commercial purposes by any means, provided that this copyright notice appears on all such copies. 2

3 Introduction The fixed and operating costs associated with agricultural machinery represent a major expense category for Southern Plains producers. The necessity of spreading equipment costs over increased acreage and the scale economies of larger equipment have been a driving force behind the trends in increasing farm size. A consequence of this issue is that small producers are unable to achieve the maximum efficiencies in machinery expenses. More efficient and technologically advanced equipment also hold higher purchase prices, making these improvements very costly to producers. This is certainly evident concerning no till equipment which is still an emerging technology and has intensive initial capital investment. Informal mechanisms for sharing equipment among farmers have problems concerning how costs are shared and an exit strategy. Formal structures for sharing machinery offer a solution to many of the problems associated with joint machinery ownership. One such formal structure is a machinery cooperative. During the formation of a machinery cooperative, members are able to address the problems described above as well and any other concerns in a written agreement (Edwards 2004). Research has been done in northern regions, including Canada, to show the benefits of machinery cooperatives. Another advantage to the formation of a machinery cooperative is the reduction in capital invested by individual farmers in machinery (Ford and Cropp). Research done by Harris and Fulton in Saskatchewan found machinery cooperatives in the region typically consist of small grain producers and have five or less members. The smaller number of farmers helps with some of the scheduling and 3

4 timeliness problems associated with machinery cooperatives (11). This research found an average expected machinery cost savings of 35% per acre more for a small grain farm in Saskatchewan that jointly owned a piece of equipment with at least two other farms rather than individual ownership (12). These cost reductions are in both capital investment and per acre costs. While the farming practices between the Southern Plains and Saskatchewan differ, the implications for cost savings available to producers in the Southern Plains through machinery cooperatives still remain. More specifically, farmers may also benefit because they would be able to create greater annual use of large ticket machines, like combines and no till equipment (Edwards 2004). When comparing individual ownership and joint ownership, it is important to consider the complements of machinery required for the different size of the operations. The costs of increasing the machinery complement are the costs of the machinery that complements the increase in the size of the power unit used due to the increase in number of acres farmed in a machinery cooperative. Pfeiffer and Peterson conducted research on machinery complements for grain production in the Northern Red River Valley. This research found the least cost complement of equipment for two farm sizes. Not surprisingly, machinery size increased with farm size, but the interesting part of the results was that increases in the probability of completion had little or no effect on the least cost complement of equipment. A main concern with machinery cooperatives is the scheduling and availability of the equipment during the optimal usage periods. Facing this problem is the key to successful joint ownership, and should be addressed during the formation of the machinery cooperative (Edwards 2001). The machinery availability issue concerns not 4

5 only the time it will take to complete a task with the given equipment set under optimal conditions, but also other factors including weather, transportation and setup time between members. A study in Sweden attempted to address the problem of timeliness for machinery cooperatives (Toro and Hansson). Producers in the different regions of Sweden face extreme variability in climate. Even with high variability of timeliness costs, Swedish farmers that were members of a machinery cooperative still experienced cost savings in excess of 15% over the time period studied. This examination of timeliness is important because it shows the ability to achieve cost savings from a machinery cooperative even in a region that experiences extreme variability in its climate not only from season to season but year to year as well. This research focuses on three objectives. The main objective investigates the potential cost savings to producers in the Southern Plains through the formation of machinery cooperatives. This will involve calculating both fixed and variable costs of production for individual ownership and multiple sizes of machinery cooperatives. A secondary objective for this research identifies the types of equipment (ex. no till planter, drill or combine) which are most appropriate for cooperative ownership. A complement of machinery is determined for the individual and a separate machinery complement is used for the machinery cooperative. Another secondary objective investigates effects of geographic dispersion of the members considering the available number of working field days and the costs involved in transportation of equipment from member to member. To make this comparison, the distance between producers is changed to determine the risk associated with transportation. 5

6 Data and Methods The focus of this research is to compare the costs of individual ownership to cooperative ownership. For this example, a base farm size of five hundred acres was established for the individual farmer. The production operations required for this example of a no till wheat farm are sowing, fertilizing/spraying four times and harvesting. All of these operations are completed by the farmer with equipment owned by the farmer. For comparison, each member of the cooperative is also assumed to have five hundred acres and has to complete the same tasks of production as the individual farmer. The machinery cooperative assumes that each farmer has an equal amount of acreage and shares all costs equally. For this example a separate complement of equipment was chosen for both the individual and the machinery cooperative. The machinery for both the individual and machinery cooperative are shown in Table 1. These machinery complements were developed for this example using information obtained from a spreadsheet developed by Darrell Kletke at Oklahoma State University. The complement chosen for the individual met the requirements to fulfill the needs of producing five hundred acres of no till wheat. This complement of equipment assigned to the individual allowed for the completion of all the operations with 95% confidence of completion. The confidence of completion level chosen is based on findings that producers generally possess equipment that exceeds their actual requirements (Pfeiffer and Peterson). The equipment set for the machinery cooperative was chosen considering the fact that a larger complement of equipment would be needed to accommodate a greater 6

7 number of acres. This equipment complement was chosen to fulfill the requirements of a three member machinery cooperative before considering transportation days or regional variation of available working days. The complement of equipment for the machinery cooperative remained constant as the number of cooperative members increased. The purpose of holding the machinery complement constant was to compare the effects of increasing the acreage on per acre savings and timeliness of completion for the machinery cooperative to the results of individual ownership. The calculation methods used to determine per acre fixed and variable costs of the machinery in this problem are from the American Society of Agricultural Engineers Standards. The depreciation and repairs and maintenance costs are calculated as an average per acre cost over a ten year period. This is done so that the costs are more comparable to what can be expected over the life of the machinery, as these two calculations tend to be higher at the beginning or end of the equipments economic life. The above calculations and machinery complement were used for calculating the cost of three sizes of machinery cooperatives. The number of members in the cooperative was varied from three to five members to determine the impact of increased acreage on per acre cost and probability of completion. It was assumed that increasing the number of members would result in an increase in the number of transportation days required to accommodate all of the members. For this assumption, the distance between each member was varied from twenty five and fifty miles. A speed of thirty five miles per hour was assumed for transportation from one member to the next, and it was also assumed that it would take and additional five percent of each members operating time to set up the equipment once it was delivered. 7

8 To account for the variation of working days due to weather in different regions, the operations were examined in four different regions of Oklahoma. Data was available for the Panhandle, Southwest, Central and Southeast portions of the state. Data was also available in the Central and Southwest regions for two different soil types. For this example, a 95% expected completion probability was used for the individual farmer and all sizes and distances for the machinery cooperative. This data allows the calculations to be compared regionally and among soil types, when data was available, to determine in what regions and for what operations the various sizes and distances of a machinery cooperative are feasible. Results The results of this analysis will focus on three main areas. First a comparison of the cost savings for the three sizes of machinery cooperative to the costs of individual ownership. The second area of focus will show how distance between cooperative members and the variation of available working days in the different regions affects the ability of the machinery cooperative to complete the required operation. The final area will examine how timeliness affects the ability of the machinery cooperative to achieve the maximum savings. It is clear that per acre fixed costs will decrease as the number of members increase. Table 2 shows that when compared to the individual ownership option, the total initial investment required per member decreased by 23%, 43% and 53% for the 3, 4 and 5 member cooperative sizes, respectively. Total variable cost increased as the 8

9 number of members was increased, but the variable costs were lower or only slightly above those of the individual owner due to the increased efficiency of the machinery complement used by the cooperative. Total per acre savings for the 3, 4 and 5 member machinery cooperative came out to 14%, 31% and 41% respectively. These savings however, do not take into consideration the increase in field day requirements for the increase in size of the cooperative discussed later in the text. Savings varied a great deal among the different machinery. The greatest savings were seen for the tractor; however, some of the variable costs associated with the tractor are tied to the variable costs of the machinery it is used to pull. The sprayer was the least expensive piece of machinery but accrued the greatest amount of use in this example for a no till operation. Per acre savings for the sprayer are over 30% for all machinery cooperative sizes. The dollar amount of these savings is small, but considering the entire acreage is covered by this implement four times per year the savings add up. For the set of equipment described in Table 1, increasing the distance between members did not seem to impact the ability of the members to complete the operations given the allotted number of days in this example. Transportation time was minimal when it was assumed that each member would require 5% of the operating time for setup. Tables 4 and 5 show that increasing the distance between members from 25 miles to 50 miles did not increase the transportation days to levels that would impact the ability of the members to complete the operations. Tables 4 and 5 indicate that the variation of the available working days in the different regions of the state and the soil type within the region had the greatest impact on timeliness. Table 3 shows that the complement of equipment individual owner would 9

10 be able to complete the operations over 95% of the years in all regions of the state. While the three member cooperative was able to complete all of the operations 95% of the time, increasing the number of members had a dramatic impact on the ability to complete the operations for the four and five member cooperative. This increase in required field days had the greatest impact in the parts of regions with clay soils and eastern region which receives the greatest annual precipitation. Sowing appeared to be the operation which faced the greatest issues for completion. The panhandle region of the state offered the greatest reliability to the members as size was increased. This region was the only region for which all of the operations for the five member cooperative were able to be completed. Sandy soils in parts of the Southwest and Central regions allowed the completion of all operations for the four member cooperative. Increased usage for the spraying/fertilizing operations appear to be of little concern, but it is possible that the available working days were overstated for the optimal period in which these operations should be completed. Discussion The results of this study indicate that there is good potential in the Southern Plains region for machinery cooperatives. Savings for the cooperative did increase as the number of members increased, but logistical problems were encountered due to the increase the days required to complete the operations. The shortage of available working days decreased the probability of completing the operations in some regions to the point that the machinery cooperative would be infeasible. However, in the regions where the 10

11 machinery was able to complete all of the operations, total savings for the machinery cooperative ranged from 14% to 31%. Completion of the operations did not appear sensitive to distance between members. This example only examines one possible structure for a machinery cooperative. It should be noted that many structures are available for a machinery cooperative. The various structures should be examined during the formation of the machinery cooperative so the structure that meets the needs of the members is selected. As machinery costs continue to increase and greater emphasis is placed on technology and conservation in production agriculture, the need for producers to find ways to reduce costs will increase. This example found there are potential savings available through machinery cooperatives to Oklahoman producers. These savings are available to producers through the reduction of initial investment and per acre cost associated with no till farming. The largest obstacle for the future of machinery cooperatives is the underlying interest of the farmers. While the machinery cooperative may reduce the farmer s time requirement, many farmers may be unwilling to give up some of their individual control. The results of this research could be used by extension educators to inform producers about the potential opportunities available through the use of machinery cooperatives. A computer based template with all of the underlying equations used in this example is currently being developed as a decision making tool for producers and to assist with extension efforts. Extension efforts should also include educating producer about the formation and organizational issues involved with machinery cooperatives. 11

12 These educational efforts include informing farmers about the different structures of machinery cooperatives available. Additional research concerning the structure for machinery cooperatives is needed to help producers understand all of the options available as well as potentially identifying a structure that would help to further reduce costs. This research should identify optimal numbers of members, acres, and methods for distributing costs among members. Because timeliness was a main concern in this example, further study should include methods that examine the possible gains from members being located in separate regions. This could possibly result in an increase of working days available due to the differences in optimal planting and harvesting periods. 12

13 Table 1. Machinery Complements Individual Ownership Tractor Type HP Annual Hours New List Price Tractor MFWD $ 74, Equipment Width Speed Annual Hours New List Price No till Drill $ 36, Sprayer $ 4, Combine $ 205, Machinery Cooperative Tractor Type HP Annual Hours New List Price Tractor MFWD $ 105, Equipment Width Speed Annual Hours New List Price No till Drill $ 105, Sprayer $ 4, Combine $ 260, Combine $ 260,

14 Table 2. Cost Comparison for Individual and Machinery Cooperatives 3 Member (per member) 4 Member (per member) 5 Member (per member) Individual Initial Investment Tractor $ 74, $ 35, $ 26, $ 21, No till Drill $ 36, $ 35, $ 26, $ 21, Sprayer $ 4, $ 1, $ 1, $ $ 205, $ 173,333.33* $130,000.00* $ 104,000.00* Combine Percent Savings on Initial Investment 23% 43% 54% Total VC ($/acre) Tractor No till Drill Sprayer Combine * 4.38* 4.64* Total FC ($/acre) Tractor No till Drill Sprayer Combine * 33.55* 26.83* Total Costs ($/acre) Tractor No till Drill Sprayer Combine * 37.93* 31.47* % Savings Tractor 48% 59% 65% No till Drill 8% 18% 22% Sprayer 32% 33% 33% Combine 13%* 33%* 44%* Total 14% 31% 41% Field Days Required Sowing Fertilizing Fertilizing Fertilizing Fertilizing Harvesting * Includes cost of using both the combines listed in Table 1 under the machinery cooperative. 14

15 Table 3. Field Days Required for Individual vs. Available Working Days in Oklahoma for 95% Confidence of Completion. Panhandle Southwest Central East Individual Field Days Sandy Loam Clay Loam Sandy Loam Clay Loam Sandy Loam Sandy Loam Sowing Fertilizing Fertilizing Fertilizing Fertilizing Harvesting Table 4. Field Days Required for Members 25 Miles Apart vs. Available Working Days in Oklahoma for 95% Confidence of Completion. 3 Members Field Days Transport Days Total Days Panhandle Southwest Central East Sandy Clay Sandy Clay Sandy Sandy Loam Loam Loam Loam Loam Loam Sowing Fertilizing Fertilizing Fertilizing Fertilizing Harvesting Members Sowing * * * Fertilizing Fertilizing Fertilizing Fertilizing Harvesting * * 5 Members Sowing * 16.25* 14.50* 17.00* 14.50* Fertilizing Fertilizing Fertilizing Fertilizing Harvesting * * 14.00* 11.25* * Indicates too few days in the region for completing the operation. 15

16 Table 5. Field Days Required for Members 50 Miles Apart vs. Available Working Days in Oklahoma for 95% Confidence of Completion. 3 Members Field Days Transport Days Total Days Panhandle Southwest Central East Sandy Clay Sandy Clay Sandy Sandy Loam Loam Loam Loam Loam Loam Sowing Fertilizing Fertilizing Fertilizing Fertilizing Harvesting Members Sowing * * * Fertilizing Fertilizing Fertilizing Fertilizing Harvesting * * 5 Members Sowing * 16.25* 14.50* 17.00* 14.50* Fertilizing Fertilizing Fertilizing Fertilizing Harvesting * * 14.00* 11.25* * Indicates too few days in the region for completing the operation. 16

17 Reference ASAE standards. St. Joseph, MI: American Society of Agricultural Engineers, Cross, T. Machinery Cost Calculation Methods Agricultural Extension Service, The University of Tennessee Institute of Agriculture. Edwards, W., and V.M. Meyer. Acquiring Farm Machinery Services: Ownership, Custom Hire, Rental, Leasing PM787. University Extension, Iowa State University, Rev. Apr Edwards, W. Farm Machinery Joint Ventures Ag Decision File A3 37. University Extension, Iowa State University, Aug Edwards, W. Joint Machinery Ownership PM1373. University Extension, Iowa State University, Rev. Apr Ford, C. and R. Cropp. An analysis of machinery cooperatives for dairy farms in the upper Midwest. Staff Papers, University of Wisconsin Center for Cooperatives, Madison, WI, September Harriss, A., and M. Fulton. The CMU Farm Machinery Cooperatives, Canada: Center for the Study of Cooperatives, University of Saskatchewan, Harriss, A., and M. Fulton. Farm Machinery Co operatives: An Idea Worth Sharing, Canada, Centre for the Study of Co operatives, University of Saskatchewan, Harriss, A., and M. Fulton. Farm Machinery Co operatives in Saskatchewan and Quebec, Canada, Centre for the Study of Co operatives, University of Saskatchewan, Pfeiffer, G. H. and M. H. Peterson. Optimum Machinery Complements for Northern Red River Valley Grain Farms, North Central Journal of Agricultural Economics, Vol. 2, No. 1. (Jan., 1980), pp Toro, A. de, and P.A. Hansson. Machinery Co operatives: a Case Study in Sweden Biosystems Engineering. 87, no. 1(2004),