Editor’s Note: This is the third installment of a four-part series on owning machinery.
As the costs of owning and operating farm equipment continue to climb, producers are considering alternative methods of acquiring machinery to stretch their investment capital.
“I’ve worked in the equipment financing industry for over ten years and I’m still amazed at how much machinery costs when it’s a purchase producers use a few hundred hours each year,” says Chad Goldsmith, AgDirect territory manager in Oregon and Washington.
“In some scenarios, pride of ownership is no longer enough to drive machinery purchases. Instead, producers are being challenged to look at their equipment as a line item on their balance sheet and breakdown their costs to make better business decisions,” he says.
Although ownership remains a popular method of acquiring long-term control of farm equipment, producers may consider four alternative options, including joint ownership, custom hiring, renting and leasing. Before making a machinery purchase, producers should evaluate how each option affects their operation in terms of capital required, cash-flow, maintenance and repairs and tax liability.
Joint ownership is one way producers can enjoy the convenience of owning a full line of equipment when it would not be profitable to cover the costs of the investment, repairs or labor alone.
While this arrangement may be ideal for reducing ownership costs per acre, producers should be conscious of their co-owner’s work habits, equipment care and operator skill to avoid conflicts during peak periods of field work.
Another option that is particularly useful for seasonal work includes custom hiring. Because this method secures both a machine and an operator, producers are free to perform other tasks and eliminate responsibility for repairs and other operating costs.
Custom hiring services are commonly offered by co-ops or custom farming businesses, but depending on availability and field conditions, the custom operator may not always be able perform the job during the optimum timeframe.
Like custom hiring, renting secures the use of equipment over a short period of time. For some producers, this may be a smart way to temporarily supplement machinery during the season or in the event of an emergency.
Renting can also be a useful tool for producers wanting to a try a new technology or production practice on their farm without the commitment of buying equipment outright. However, because no operator is furnished, the renter is responsible for labor and daily maintenance.
Compared to other alternatives for acquiring machinery, Goldsmith says leasing is becoming an increasingly popular choice among producers aiming to preserve working capital and monitor cash-flow.
“With a lease, producers can typically get a lower annual payment versus a traditional loan, and if the lease is structured properly, they can deduct the entire lease payment off of their taxable income,” he says.
“Leasing allows producers to get into machinery they otherwise wouldn’t be able to afford, and for the more progressive growers, it has provided an opportunity to keep equipment under warranty, reduce repair costs and keep the latest and greatest technology on the farm.”
Before entering into a lease agreement, producers should always consult with an accountant or another professional tax adviser to understand how the lease will be treated for tax purposes.
No matter what equipment purchases you’re considering, AgDirect can help you make the right decision for your operation. Click to learn more about calculating cost of ownership, locate your nearest AgDirect territory manager or contact the AgDirect Finance team at 888-525-9805.