Custom Hire versus Used Combine Ownership
A 500-acre corn–soybean farm in central Illinois is deciding whether to replace its 20-year-old combine. The farm currently hires a custom combine for $45/acre, and the custom operator is reliable but sometimes arrives 5–7 days after the field is ready. The proposed replacement is a used combine priced at $180,000, expected to last 7 years and have a salvage value of 40% of purchase price. The dealer offers 6% simple interest on the average investment. Estimated annual costs are repairs $12,000, insurance $2,000, fuel $8/acre, and labor $6/acre. The farm harvests 500 acres per year, and the combine's capacity is adequate. The owner has off-farm income and is in the 24% federal marginal tax bracket; the farm uses cash accounting. The custom operator's rate is expected to rise 5% per year. The farm has no storage for extra grain and relies on timely harvest to avoid lodging and wet grain.
1. Calculate the annual ownership and operating cost per acre for the used combine and compare it with custom hire. Show your assumptions.
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Using the stated assumptions: depreciation = ($180,000 − $72,000) ÷ 7 = $15,429/year. Interest = average investment ($180,000 + $72,000) ÷ 2 × 6% = $7,560/year. Insurance = $2,000. Fixed ownership cost = $24,989/year. Operating costs: repairs $12,000 + fuel ($8 × 500 = $4,000) + labor ($6 × 500 = $3,000) = $19,000/year. Total = $43,989/year, or about $88/acre. Custom hire = $45 × 500 = $22,500/year, or $45/acre. On these numbers, custom hire is about $43/acre cheaper, or about $21,500/year. The calculation assumes the used combine has adequate capacity, the salvage value is realized, and repairs do not rise above the estimate. It also ignores tax depreciation and the opportunity cost of capital, which would not close a gap this large. A replacement decision should not be made on the purchase price alone.
2. What non-financial and risk factors should influence the decision, and how would you weigh them?
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The biggest non-financial issue is timeliness. A 5–7 day custom delay can mean wet grain, higher drying cost, lodging, and harvest loss, especially in a wet fall. But the ownership cost gap is about $43/acre, so delayed harvest would have to cost more than that per acre every year to justify the combine. I would quantify the risk: what is the farm's average harvest loss per day of delay, and does the custom operator guarantee priority? Other factors include the owner's labor availability, mechanical risk of a used machine, access to parts and service, storage and drying capacity, and the flexibility to harvest at optimum moisture. Tax depreciation and the ability to use Section 179 or bonus depreciation may improve the after-tax picture, but they do not create cash. A smaller used combine, a shared ownership arrangement, or a custom contract with a priority clause may be better than either extreme. The decision should compare total cost and risk, not just the monthly payment.
3. At what harvested acreage would ownership become competitive, and what would you advise the owner?
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Break-even acreage uses fixed costs divided by the per-acre advantage of owning over custom hire. Fixed costs are depreciation + interest + insurance = $15,429 + $7,560 + $2,000 = $24,989. Variable cost per acre is fuel $8 + labor $6 + repairs $24 = $38. At a $45/acre custom rate, owning saves $7/acre in variable cost, so break-even = $24,989 ÷ $7 ≈ 3,570 harvested acres per year. At 500 acres, the farm is far below break-even. My advice is to continue custom hire, negotiate a priority or guaranteed-window clause, and keep a written estimate of harvest loss and drying cost to test the decision each year. Revisit ownership only if acreage expands substantially, the custom rate rises well above $45, or a smaller machine changes the fixed-cost picture. The analysis should be updated with actual quotes and tax effects before any purchase.