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Diesel Fuel Surcharges

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Cowpuncher

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A lot of companies (trucking, custom farmers, etc.) are adding fuel surcharges to their rates and invoices. This is completely understandable since they cannot expect to absorb the increased cost of fuel without eventually going out of business.

However, the amount of some of these surcharges are several times the additional cost of fuel. Some truckers have increased their rates from $2.00 to $3.25 per mile. A farmer who does occasional work for us raised his acre rate from $7.00 to $10.00.

Some arithmetic will show that these fuel surcharges are more than the total cost of fuel. Generally, in our area, and considering the type of equipment, it takes a gallon of diesel to make a pass with a drill or sweep over an acre. With farm diesel running about $2.00 per gallon, this fellow is making $1.00 per acre on the fuel surcharge.

Gotta check for new vendors or do it ourselves.
 

Muratic

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Cowpuncher said:
With farm diesel running about $2.00 per gallon.

Where are you getting tractor fuel at $2.00 a gallon?
 

Jason

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There is more involved in those rates you quoted. The initial rate was far too low. They should have raised rates long ago.

I raised rates for cutting hay this year by $3 an acre, more than the increase in fuel, but catching up with increased costs that I had absorbed for the last 4 years.

The new rates you posted look more reasonable, even at those rates most companies would tack on 7% fuel surcharge.

Go try to buy the equipment needed to do the job yourself. It may or may not pay based on the number of acres you have. Even then remember you are getting labor and repairs as well as capital investment covered by the custom operator.

The other thing to consider is capital expenditures usually have to be depreciated but custom work is a straight expense.
 

Cowpuncher

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Jason,

You are correct about the capital cost of equipment and other costs, but try this:

We are planting a lot of farm ground back to grass.

We have a John Deere 4630 tractor with about 12,000 hours on it and it completely depreciated. In the last year, we changed oil and filters on it. It farms 80 acres in a day on 80 gallons of fuel. I pay an operator $10 per hour (More than mosts here).

Our sweep plow is not fully depreciated, but I bought it for $2300 about 6 years ago.

We plant grass with a John Deere 3020 tractor which is also fully depreciated. Just spent $50 for a new voltage regulator. It will drill all day on a tank of diesel. The county has a grass drill which can be borrowed for grass planting. I have 400 acres to be planted. Do I pay someone $4,000 to do this or do I spend 250 gallons of fuel and $400 for labor?

I am an accountant by training and spent years doing economic analysis.
I do not fall in love with new high dollar tractors and equipment.

We do have a neighbor who does our mechanical work - mostly on ranch trucks - who charges us $10.00 per hour.

We spend our money on water pipelines, new fences, corrals and additional land.
 

mrj

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Cowpuncher said:
Jason,

You are correct about the capital cost of equipment and other costs, but try this:

We are planting a lot of farm ground back to grass.

We have a John Deere 4630 tractor with about 12,000 hours on it and it completely depreciated. In the last year, we changed oil and filters on it. It farms 80 acres in a day on 80 gallons of fuel. I pay an operator $10 per hour (More than mosts here).

Our sweep plow is not fully depreciated, but I bought it for $2300 about 6 years ago.

We plant grass with a John Deere 3020 tractor which is also fully depreciated. Just spent $50 for a new voltage regulator. It will drill all day on a tank of diesel. The county has a grass drill which can be borrowed for grass planting. I have 400 acres to be planted. Do I pay someone $4,000 to do this or do I spend 250 gallons of fuel and $400 for labor?

I am an accountant by training and spent years doing economic analysis.
I do not fall in love with new high dollar tractors and equipment.

We do have a neighbor who does our mechanical work - mostly on ranch trucks - who charges us $10.00 per hour.

We spend our money on water pipelines, new fences, corrals and additional land.

What kind of prices does grassland sell for in your area? Can you make that "pencil out" and pay for it raising cattle on it?

Relatively recent land sales in our area, for both grass and farmland, has been $400.00 to $500.00 per acre. It should take at least 25 acres of grassland to run a cow for a year. Farmers may get by on less. Doesn't take an expert in economics to see that it won't work. Inflation has to be highly counted on to make those prices work, and it will take an awful lot of years, IMO.

MRJ
 

Jason

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Cowpuncher, I think you just answered your own question. You have the equipment, can hire labor cheaper than most anyone can, have a backup person for repairs, why did you ask in the first place?

The question of the land values is totally seperate. If a person chooses to buy land that is not viable for their operation, they subsidize it to buy it, or lose it.

I would think doing the grass seeding and saving the difference between labor and repairs/fuel and the custom rates is part of the subsidy.

BTW Cowpuncher, you still have to figure a cost for the totally depreciated machinery as you need to replace it sooner or later. They don't last forever.

All this still doesn't change the reality that a custom operator needs to charge enough to make his operation viable. The rates quoted are fair.
 

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