Evaluation of costs

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Size of Investments

Agricultural practices in industrialized countries have become complex and almost completely mechanized. In contrast, in developing countries, only some operations are mechanized while others continue to be manual or use animal-drawn implements.

The scale of mechanisation depends on the type of farm and working methods. Thus, the size of investment varies greatly from one situation to another: assuming a given value of 1 for a pedal-operated thresher, it is between 10 and 60 for a power-driven unit and between 60 and 300 for a combine harvester.

Accordingly, if a pedal-operated thresher can be purchased by a farmer with a 2 to 3 hectare farm, a powered unit or a combine harvester can be purchased only by groups of farmers or private contractors provided that financial means (agricultural credit, technical aid, etc.) are made available. Lastly, the choice of equipment must be justified economically, cost-effective, and capable of increasing work productivity.

The same consideration applies to the different harvesting and cleaning machines. In addition, prior to any investment the total operating cost of the equipment must be estimated.


Calculation of Operating Costs

Theoretically, the costs of mechanized operations are easily calculated when all the expenses involved are known. This is not always the case in developing countries.

(i) Estimated operating cost

The cost of using farm machinery is generally calculated as a cost per hour. This provides useful information for deciding whether to purchase equipment, the type of machine to be selected and the renting rates to be applied in case of collective use of the equipment.

Such estimates are necessary for loan companies, dealers selling on a credit basis or agencies funding large-scale investment operations.

Fixed costs

These are independent of how much the equipment is used per year. They include the interest on capital (generally at the rate applied by local companies on medium-term loans to farmers), possible taxes, levies and shelter charges, and also insurance premiums if any.

In developing countries, only interest on the capital invested (return on tied-up capital) is considered. Insurance is taken into account only for the purchase of large equipment on a credit basis (a requirement of the loan company). There are very few farmers or farmers' groups who invest in buildings to shelter their equipment.

Rates usually applied are as follows:

Costs variable under certain conditions

These include depreciation, and repair charges for the equipment.

The cost of depreciation is the original cost distributed over the estimated useful life of the equipment in order to recover the capital required for its replacement.

When the expected annual hours of use are higher than the ratio of depreciation period in hours to the number of years of use, depreciation must be charged to variable costs. Below this value, it is charged to fixed costs.

In developing countries, depreciation as regards the purchase price (resale value supposed nil) also includes transport, handling, installation and starting up costs.

The depreciation period is expressed as a quantity of work (hours or hectares) and as a number of years. For a loan company such value must never be below the life of the loan granted.

Repair charges include the costs of labour and spare parts. They are generally related to the purchase value using coefficients calculated from surveys among manufacturers and repairers in industrialized countries. The same coefficients are used in developing countries, because relevant information concerning them is rather scarce: the costs of spare parts may be higher, but this is compensated for by the lower cost of labour.

Table 4.1. Estimated useful life and repair coefficients for some agricultural machines.

Equipment Depreciation Repair coefficients
Years Hours
Wheeled tractor 6 6000 0.5
Harvester 5 2000 0.5
Thresher 10 5000 0.7
Combine harvester 6 3500 1

Note: These figures are only indicative and are subject to high variation depending upon how the equipment is used.

Actually variable costs

These costs are proportional to the annual working time; they include the costs of fuel, lubricants, operation and maintenance.

Fuel consumption is expressed as: O.191/hp/hour for petrol engines and 0.121/hp/hour for diesel engines.

Coefficients must be adjusted according to the nature of the work undertaken by the equipment when in operation. For example, in Senegal an average consumption of 101/h, travel time included, has been recorded for 123hp combine harvesters (i.e. 0.081/hp/hr) and 101/hr for 100hp tractors (i.e. 0.101/hp/hr) with offset attachments for tillage. Such values must be used with care because they vary according to the work performed (engine power required) and the method of recording work time - see (ii) below. For more accuracy they can be easily verified in the field for different types of work.

Lubricant consumption is calculated from the engine consumption. For tractors and combine harvesters, oil changes for the gearbox, axle and hydraulic system must be taken into account. Average values can be given as follows:

Labour costs (operator. mechanic 'equipment manager' etc.! and supplementary expenses are estimated according to local wages (on an hourly, monthly or piece-work basis) to which must be added travel costs and sundry expenses (transport, maintenance supplies, close support vehicle, etc.).

In many developing countries labour costs and sundry expenses may be high: e.g. in the Senegal river valley 5 workers (1 operator, 1 apprentice, 1 'pointeur', 1 mechanic and 1 manager) plus one permanent support car are required for a combine harvester.

(ii) Observation on some elements of calculation

Depreciation is the key factor which determines whether mechanization projects can be repeated or sustained. Many such projects have disappeared because they were unable to incorporate sufficient reserves for amortizement.

Efforts to evade such problems include:

Estimating the annual working time is of upmost importance. For a tractor one generally allows 1000 working hours. The basic factors used for calculating the expected working time are (a) the time required for each operation with the equipment concerned, and (b) the area worked.

The stock of spare parts must be carefully examined because it corresponds to locked-up funds. It is composed according to the distance from suppliers, the size and features of the equipment pool, and the working conditions of the machines. Suppliers' lists must be adapted to local requirements.

The operating cost per hour of farm machinery permits the cost of the corresponding cultural operation to be determined. This will vary according to the time required for the operation, equipment used, working conditions, skill of the work force, and the distance of the working site.

The efficiency of the equipment is the time required for carrying out the work with it. The 'theoretical' efficiency is the capacity per hour derived from the technical specifications of the machine concerned; the 'actual' efficiency is expressed as working time in the field; and the 'practical' efficiency is the working time which also includes time for stoppages, turning, making adjustments, etc.

In the Senegal delta region, for example, the theoretical efficiency of a combine harvester is 1 hour per hectare (4t/hr for a 4t/ha crop); with a travelling speed of 2.2km per hour for an actual working width of 3.9m (cutter bar 4.2m wide), its actual output is 1 hour and 30 minutes per hectare, while its practical output is 2 hours and 30 minutes per hectare when time for travel, hopper emptying, etc., are included.

(iii) Actual operating cost

The actual operating cost can be determined after an operation, a campaign or at the conclusion of the pay out period. Some aspects must not be omitted, such as repair costs increasing as the equipment gets older, and the market value of actual expenses when the currency used is not stable.

The actual operating cost determined at the start of actual expenditure assumes value only in terms of the references in which it was established. The method of calculation is the same as that used for estimating costs (see above), but employs data actually recorded during the reference period. Such data must be written down in the log-book and 'monitoring book'.

The log-book is kept with the equipment everywhere it goes; it is used to record the following data:

The monitoring book is kept at the farm and records the history of the machine; it must comprise:

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