Though it may be a hard case to make for some producers, leasing machinery instead of buying outright is just one buying habit that can help weather a commodity market downturn like the one underway right now in farm country.
Tightening crop profit margins – some already well below breakeven – signal necessary changes in how some producers manage machinery costs to get more from what they spend and maximize that machinery’s utility and efficiency on crop farms. Operational needs, overall costs, depreciation and equity are all major factors to consider in adjusting how and when you purchase machinery, according to AgDirect Territory Manager Nick Johnson.
“Make sure you answer the question ‘Is this a want or a need?’” he says. “A good buying habit is to look at your situation and what kind of cash flow you have, then evaluate potential purchases versus doing it because of short-term benefits like Section 179 tax incentives.”
Weigh equity and depreciation
After identifying these key factors, it’s important to look at where you stand when it comes to equity. Some buyers maintain a newer fleet of machinery, trading more frequently and retaining more overall equity. But, maintaining that equity can have a higher overall price tag versus leasing, for example. Leasing may remove any equity a producer has retained over time, but it eliminates the financial drain that comes with depreciation. And, in a time when machinery depreciation is accelerating but producer margins remain tight, that could be a compelling case to switch from outright ownership to leasing.
“Producers who are trying to build equity are the ones who can benefit from leasing. Leasing is a tool, not a ‘poor man’s way of getting equipment,’” Johnson says. “When producers can pay for usage instead of building overall equity in something that’s depreciating faster than they can keep up with, they can grow because they’re not so strapped from an installment burden as they once were.”
“The lease is much like a purchase where if you do need to change, you can. But, you need to make sure you’re ahead on depreciation,” Johnson adds.
Avoiding negative equity should become a high priority for many producers as they plan their machinery management moving forward. Doing so likely involves taking a longer view of your machinery needs, how you will pay for that machinery and how the right combination of those variables can keep you from facing depreciation that could put you in the red.
“I think producers really need to stop thinking about buying something to get you through the year, and start thinking about something to get you through the next three to five years. Since machinery is depreciating so much faster than it used to, producers who go to trade something in the first year or two after purchasing are going to be upside-down, especially if they have no equity,” Johnson says. “If you’re thinking three to five years ahead, you’re not absorbing that negative equity.”
Consider machinery in the broader context
Keeping machinery payments down through purchase options like leasing is one buying habit that’s going to remain critical in the near term, but it’s just part of a bigger picture. Though it helps trim machinery spending specifically, lower machinery bills can help producers go a step further in maintaining financial efficiency and, ultimately, taking advantage of growth opportunities both while the markets strain profit margins and after they cycle higher.
“If I’m a producer leasing equipment and put what I save into my ground, my cattle or my operating line because I have a lower installment balance, that’s going to do nothing but allow me to grow when things do turn around,” Johnson says. “You have to look at the whole picture.”