The considerations that should apply in a choice of this nature correspond to those dealt with concerning the decision to replace labour with farm implements. The same techniques of comparing costs should also be used to weigh up the economics of the two alternatives against each other.
11.1 The following additional aspects in particular are relevant to this choice and/or deserve special emphasis
- The opportunity cost of the labour (driver and machine operators) that is required in the case of ownership, and which is therefore saved by the use of a contractor, can differ to a large extent from the wage rate of such workers.
- The possibility exists that the use of a contractor will result in a reduction of quality and/or yield because he will take less care than the owner. On the other hand, there is the possibility that the contractor has more specialized knowledge or implements than the farmer and that the quality and or yield could improve if he is employed. Such differences must also be included in cost comparison
- Closely related to the above is the question of the timeliness of the operations. A delay in operations, sometimes even by a day as in the case of insect and pest control, can cause large variation in yield and quality. On the one hand, dependence on a contractor may cause delay, because he is possibly employed elsewhere, with resultant large reductions in yield and quality. On the other hand, because the contractor has bigger and better equipment, he may expedite the operations and prevent or reduce such losses. The cost comparisons should also make provision for these contingencies if it is at all possible to predict their occurrence and/or extent.
- The considerations with regards to eliminating restrictive factors during peak times with the resultant potentially more profitable total production plan, the reduction of the risk associated with large capital investment in fixed and movable assets and possibly more profitable alternative opportunities for capital investment, also favour the use of a contractor.
11.2 When choosing between buying farm implements and hiring them on contract, a general rule is that a farmer should only buy implements that:
- Are used intensively during the year because this leads to a low unit cost
- Have a relatively low purchase price; and
- Are necessary where the timeliness of operations will have a critical influence on the quality and/or yield.
11.3 The purchase of new, as against used, farm implements.
What are the advantages and disadvantages of buying used farm implements compared with new ones and under what conditions are used implements most suitable?
- New implements require a greater capital investment than used ones, However, used implements do not necessarily lead to saving in cost, but especially where capital is a limiting factor, the capital is saved by purchasing used implements can be invested more profitably elsewhere.
- Used implements are usually more suited to smaller farms. The high fixed cost per unit on smaller farms will have a direct influence on the profitability, while economies of scale on larger farms will ensure that the fixed costs of new implements per unit will be lower
- Used implements are usually less reliable than new ones and activities with them are usually slower because of interruptions for repairs. Farmers with small farms therefore have a smaller risk that their activities will not be completed on time than farmers with larger farms
- Used implements can also results in quantitively and qualitatively lower yields than when using new implements
- In general, the purchase of used implements leads to higher variable costs relative to fixed costs. Depreciation, interest on capital and the implements have higher repair, fuel and labour costs.
- Because of the greater amount of repair work, the farmer’s mechanical ability is an important consideration when buying used implements.
The following example is one method of comparing the costs of new and used farm implements
Example 11.1
A cost comparison between new and used implements
- Available information and calculation
New implements used implements
Cost price R100 000 R50 000
Expected useful life 10 years 5 years
Annual depreciation R10 000 R10 000
Repair costs per year R6 000 R9 000
Insurance premiums R2 500 R1 250
Total annual costs (interest excluded) R18 500 R20 250
- Conclusion
Judged on this basis, the new implements have cost advantage of R1 750 per year over the used implements
However, the interest on the capital investment must still be taken into account. The reason for this is that the additional investment of R50 000 (cost price of the new implement minus the cost price of the used implements) is made for a period of five years (the budgeted useful life of the used implements) in the new implements. A calculation should therefore be made to determine the “break-even rate of interest” of the additional capital investment in new implements.