What benchmarks can be aimed for in respect to machinery investment?
‘Machinery income efficiency’ is an indicator that reflects the ratio of machinery assets to farm income.
It is a whole-of-business benchmark that provides a guide to the typical amount a farm business can invest in owning machinery.
It is calculated by the equation; machinery income efficiency = total machinery assets / total farm income (where total machinery assets is the current market value of all machinery and total farm income is the average farm income over the last four years).
As a benchmark, average machinery income efficiency for producers in Western Australia is around 0.6 and has been trending down as efficiency has improved, shown in Figure 2.
This ratio indicates that farms have the equivalent of around 60% annual income, on average, tied up in machinery/plant capital or, to put it another way, the farm is generating $1 income for every $0.60 invested in machinery.
Please note that this ratio should not be acted on in isolation.
It does not account for other factors that influence the cost of machinery such as operating costs, use of contractors, hired equipment and the livestock/cropping enterprise mix.
For example, if machinery is old or hired the machinery income efficiency may be very low and appear healthy but the operating costs may be very high, reducing profitability or productivity.
Hence to analyse how much to invest in machinery the business must understand and analyse the full cost of machinery (capital and operating), cost of alternatives and opportunity cost of under-investment (for example, delays).
Another indicator to consider benchmarking is the cost of repairs and maintenance as a percentage of plant or machinery value.
Figure 3 highlights that, on average, expenditure on repair and maintenance accounts for around 7-8% of the farm’s plant value (majority is machinery) for producers in WA.
