Editor’s Note: This is the second installment of a four-part series on owning machinery.
Although owning and operating farm equipment has always required good financial management, market volatility has challenged producers to sharpen their focus on these fixed costs to make better business decisions and improve profitability.
“There are a lot of different ways producers can approach calculating equipment costs,” says AgDirect Territory Manager, Chris Schimke. “Depending on the operation, a producer might measure on a cost per acre basis or in terms of cost per hour.”
Calculating costs using these benchmarks can help producers determine when to trade machinery, what to acquire and how much capacity to invest in.
Trading and controlling costs
Knowing when to trade equipment requires familiarity with the economic life of a machine, the number of years over which costs are estimated, as well as the salvage value – the amount expected in return at the time of the trade-in.
According to Schimke, a producer should opt for an equipment upgrade when maintenance costs are equal to or exceed the principal and interest of the new machine.
“The way machines are made today in terms of technology and sophistication, it doesn’t take long to incur a hefty repair bill,” says Schimke. At some point, producers have to decide how much they are willing to spend on maintenance and repairs.”
One strategy producers have used to avoid this dilemma includes keeping machines current under warranty, but Schimke acknowledges that hasn’t always been the trend.
“Many producers purchased new machinery five to seven years ago. When the market turned, they committed to maintenance to make those purchases last as long as they could.”
Making a case for used equipment
Another strategy for reducing ownership costs includes investing in used equipment.
Casey Seymour, a used equipment remarketing expert and owner of Moving Iron LLC, says producers’ belt tightening over the past few years has renewed interest in the used market.
“I’ve been a firm believer that the spike in used equipment sales has nothing to do with producers having excess cash. I think everything is revolving around the need to replace,” says Seymour. “Producers have run their equipment for so long that they’ve hit some critical reconditioning points – some which may require a $20,000 to $30,000 bill to avoid maintenance failures.”
Seymour predicts the expansion of qualifying property under Section 179 may also be a driver for used equipment purchases this year.
“Now that Section 179 covers both new and used assets, more producers will be looking at used equipment because they’re going to get the same tax advantages,” he says.
Unique solutions for equipment financing
While many producers take pride in equipment ownership, Schimke says machinery leasing has become an increasingly popular tool for managing cash-flow.
“It all depends on how producers are accounting for their costs and if their real concern is cost of ownership or cost of production,” he explains. “We have loan packages to fit every producer’s needs, but if their concern is cash-flow or cost of production in the short-term, a lease may be the best solution.”
“Leasing allows for a lot of innovation to take place, and just like any other financing option it can be a good risk management tool if used judiciously,” Schimke adds. “At AgDirect, we always strive to offer the most cost-effective financing available and we tailor our packages to meet our customers’ needs.”
Click to learn more about making equipment purchases during periods of tight profit margins, locate your nearest AgDirect territory manager or contact the AgDirect Finance team at 888-525-9805.