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Should you buy a combine, or stay with custom?

The decision depends on how much you lose to spoilage, so you need to think like a grocery store produce manager

Sue and Jim have increased their grain and oilseed operation to 4,500 acres. Until now they’ve hired a custom combine operator, but he’s retiring. Originally they had hired him as a means of economizing investment, but now they are more financially secure. They already have swathing and hauling equipment, and wonder if they should buy another combine, but have not rejected the option of seeking a new custom operator.

For awhile in the past, Jim supplemented the family income by working in a grocery store in the winter. His job was mainly in the fresh produce section. While this activity might seem remote from a harvest equipment decision, Jim sees a connection. Dealing in produce involves buying fruits and vegetables and displaying them for sale. If the store can buy larger quantities it can get a better deal. But if it buys more than it can sell in a few days, it has to discard goods reaching the point of spoilage. The trick is to buy enough to get a discount but little enough to avoid spoilage.

The store also needs to factor in that spoilage increases with each additional day that inventory is held. It can then pick a sweet spot.

Crops also spoil

What’s the connection to farming? Crops left in the field may be affected by hail, wind, rain, snow, birds and who knows what else. Yes, this is spoilage. The longer a mature crop is left unharvested, the greater the chance of spoilage. So timeliness of harvesting affects inventory spoilage.

Timing of harvest can be controlled — at a cost. Maybe this takes the form of paying extra for a reliable custom operator. Maybe it means buying two combines instead of one. This is like declining the highest discount available in grocery store purchasing. You are going to pay extra to get your crop off more quickly.

The costs of buying or hiring combines can be calculated in a fairly straightforward manner. The other part of making the optimum combining decision involves knowing something about the exposure to spoilage.

If you could combine the whole crop on the day it matured, there would be no spoilage risk, but dream on if you think there is a custom operator ready to park a fleet of combines in your yard waiting for you to decide if today is the day to harvest that 640 acres of barley. Or that you could afford to buy the number of combines needed to do it yourself.

How much crop for how long?

Sue and Jim have given inventory more thought. First, they realized that their decision will affect their future. They have to think not of any one year but of what will likely happen on average in future. Then, they could think about what their average crop inventory would be without any combining. It would increase as the crop ripened and then remain the same.

They estimated that the crop would all ripen within about 10 days. That would mean they would have an average of 450 acres of ripe crop the first day when the crops were ripening, 900 on the second day, and so on until at the end of 10 days, they would have all 4,500 acres ready for combining. Their inventory would then stay at that level if they had taken no action.

Next, they thought of how much crop inventory they would have if they started harvesting at the first opportunity. On the first day of harvest 450 acres would have ripened — if they could combine 150 acres a day, they would have 300 acres left unharvested after the first day. The remaining crop would keep maturing at this rate until all was ripened — in 10 days. By then, they would have combined 1,500 of their total 4,500 acres, with 3,000 lying unharvested.

From then on, at 150 acres per day, they would reduce the inventory to 2,850 acres on day 11, 2,700 on day 12, and continue until at day 30 (4,500 acres/150 acres per day) all would be in the bins.

Some graphs can illustrate this. Graph 1 (above) shows how much crop they estimate will be out with no combining. Graph 2 (below) shows how much will be in the field if they combine at 150 acres per day. From the second graph they can see that over the 30-day period their inventory ranges from zero to 3,000 acres. This leads to the conclusion that on average they expect to have 1,500 acres lying out for 30 days.

That’s a start. They now have estimated how much crop will, on average, be exposed to the elements for how long.

The cost of waiting

Let’s pause and look at the quality of our information. Do Sue and Jim know for sure how long, on average, it will take their crop to ripen? Can they go to some easy source and look this up? No, they will have to estimate the amount, based on their own experience and whatever consultation they may be able to do.

The same holds for the rate of combining. There are going to be some days with 20 hours of good combining conditions and some when it’s raining all day or there is heavy dew until 2 p.m. They will have to make their best estimate, again based on their own experience and that of their neighbours, or any other sources of information they can find. Perhaps regrettably, that’s the nature of planning — but would farming be very interesting if everything was predictable?

There is an even trickier estimation question: How much spoilage can they expect when grain lies unharvested? One thing we can be sure of — it’s not trivial. A light shower on malting barley can cut its value by a third, and with a couple of big rains the windrows can look like lawns. Feed barley and wheat can sprout, too, and lose quantity and grade. Hail may strike at any time, with canola being super-sensitive. In some areas, snow may come early. If yields would have been poor anyway, crop insurance may cover the losses, but if yields are good, Sue and Jim may absorb all the spoilage.

One approach for calculation

In the absence of much locally relevant research information, if spoilage is important it must be estimated (guesstimated?). Here is one approach. Ask yourself how much loss you would have if grain laid out for a month. On malt barley, predict a write-off, on canola maybe a one or two per cent chance of late hail and perhaps a little allowance for wind and other things.

On other crops, the estimate would lie somewhere in between. My own guess, which I will transfer to Sue and Jim, is that in 30 days there would be a probable 30 per cent loss, or one per cent a day. They guess that crop insurance would cover a fourth of this, and to avoid exaggeration, they decide to settle on two-thirds of a per cent a day.

Now we can go back to our earlier example, with 4,500 acres ripening over 10 days and harvested at 150 acres a day. That left an average of 1,500 acres lying out for 30 days. That means, at 0.67 per cent spoilage per day, losing 20 per cent of 1,500 or 300 acres of crop. If Sue and Jim budget at $400 per acre, that’s definitely not trivial — $400 x 300 acres = $120,000 in expected spoilage.

Is there anything that can be done to reduce this? Yes, reduce inventory. How can this be done? By increasing the harvesting rate.

For example, if one combine can harvest 150 acres a day, buying a second will increase that to 300 acres. At that rate, if crop is maturing at 450 acres a day, the combines will not keep up but will come much closer. At the end of the 10-day ripening window, there will be only 1,500 acres out, and this will be eaten up in another five days (see Graph 3 below).

With peak inventory at 1,500 acres, average inventory will be 750 acres and it will be lying out for 15 days. That average inventory, valued at $400 per acre, is $300,000. Losing value at 0.67 per cent per day for 15 days, the expected spoilage loss is 10 per cent x 300,000 = $30,000.

Comparing the options

Dropping the spoilage loss from $120,000 to $30,000 means an estimated benefit from a second combine of $90,000, due to spoilage control.

Using standard financial analysis, Jim and Sue calculate the cost of owning an extra combine at about $70,000 per year. So, while a second combine can’t be called a slam dunk, it looks positive, and they decide if they are going to go the ownership route, two combines would be better than one. But there’s still the custom combining alternative. And that, too, will not be spoilage-free.

Sue and Jim have been in touch with two custom operators — let’s call them A and B. A has three combines, but does some farming of his own. He is open about the fact that his own crop comes first. Operator A farms nearby, so his crop is likely to ripen about the same time as Sue and Jim’s. Accordingly, they conclude that it will be at least a few days after all the crop is ripe before A will show up. They decide to make another graph describing A’s harvest, with a 14-day delay and then steady work with three machines, to look at their crop inventory situation in the A case.

Both operators have good reputations, and Sue and Jim are confident they are truthful. One thing appealing about hiring A is that his price is $28 per acre. Operator B is considerably more expensive at $38, but B runs a custom-combining business, with four combines. He combines in the States, but he says that he expects to be back in Canada before harvest is underway. He wants to run his combines steadily, so he says he will come when about half the crop has ripened.

Sue and Jim call this a six-day delay. Graphs 4 and 5 (below) show the crop lying out for the two custom operators, with A combining at 450 acres a day and B at 600.

It is apparent from the graphs that there is much more grain exposed to the weather with A than with B. It turns out that with A, on average over 2,625 acres are exposed for the 24 days from start of ripening until harvest is done. With B, the figures are 1,583 acres out for 13.5 days. Moneywise, this works out, again at a $400 crop per acre and a 0.67 per cent daily spoilage rate, to $168,000 in total spoilage for Operator A, with a per-acre value of $37.33. For Operator B, total loss is $57,000, or $12.67 per acre.

The difference between A and B is $111,000, or just under $25 per acre.

The extra $10 per acre that B is charging looks pretty small now, since his work should reduce spoilage by $25 per acre. Between operators, B is preferred, by a comfortable margin.

At this point, the harvesting choice has been narrowed to either buy two combines, or hire the work done at $38 per acre. Now Sue and Jim do some more figuring, and decide to allow $10 per acre for fuel, labour and maintenance, if they combine themselves. Here is how their numbers add up:

It’s a close call. Given the uncertainty in all the estimating, the difference is negligible. So the choice will probably come down to issues such as “how nice to have someone else worrying about maintenance”and “how reassuring to have full control of timing by running our own machines.” But in the process of investigation, two alternatives, one combine and hiring the late-arrival custom operator, have been rejected. The basis of the rejection, in both cases, started with careful attempts to estimate inventory spoilage — grocery store economics.

Glen Mumey is professor emeritus at the University of Alberta who has taught and conducted research in agricultural finance.

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Comments

  • Will Gracely

    Mr. Mumey, there are some custom harvesters reading this article that feel you didn’t give custom harvesting a fair shake in your options of operators to hire. Would you be interested in addressing their concerns? The discussion can be found at facebook.com/HiredIron