The supply and demand market of agriculture that creates cashflow instability cannot be avoided, but having strong oversight on all expenses can help mitigate risk. Accounting for all expenses is critical to keeping a business running efficiently, from estimating upcoming fiscal needs to knowing what level grain and livestock sales need to be to produce a profit.

Part of the accounting process is identifying overhead costs associated across all acres to maintain the operation. We start by identifying those line items and establishing a per-acre value to apply across all the acres in the operation.

Overhead costs like building maintenance, insurance, and equipment used in direct fieldwork make up the majority, but other support equipment that may seem small can add up over time. The support equipment is the connecting links between and around the farmland, such as, a pickup, loader tractor and attachments, trailers, mowers, small sprayers, UTV’s, farm shop tools, etc. These slowly accumulate over the years and have costs that creep in one by one. These support lines can add in a farm’s overall fiscal load.

Thoroughly itemizing each piece of support equipment requires calculating.

1. Useful Life. The useful life of support equipment is a time that is the realistic time span, as most support equipment is usually not a precision piece that needs updating often, (unless it’s an auger or seed tender, those are directly connected to product quality).

2. Salvage Value. Estimate what the value is at a time frame that fits your operation.

3. Estimated Yearly Costs. Estimated yearly costs is the ongoing maintenance of the equipment, and may include items like, blades, tires, gearboxes, etc.  

Formulas for establishing per acre costs can be found at University Extension offices and online, and the formulas used for direct field equipment can be used for support equipment also. The following chart is to bring attention to typical farm items, cost to acquire them, value at the end of their useful life and upkeep cost, all based on 2,000 acres for a 10-year life span.

The second column is the cost to acquire the equipment, with total cost per acre at the bottom. The third column is the estimated salvage value, with total cost per acre return at liquidation at the bottom. The fourth column is the upkeep costs that gives a cost per acre. Total Cost per acre: $8.65 - $3.05 = $6.77 per acre on a yearly basis.

This is a small example of what most farm operations consider in their overhead costs category. Maintenance expenses such as new tractor tires is now not just an expense one can absorb, it’s becoming a major expense. Software updates and electronic repairs of equipment is also now significant in agriculture today.

Understanding the nuances of farm operation accounting is one of the many aspects of successful farmland management. Landowners interested in learning more about Peoples Company’s approach are encouraged to contact Peoples Company Land Management at landmanagement@peoplescompany.com or visit www.PeoplesCompany.com.