Editor’s Note: This is the fourth installment of a four-part series on owning machinery.
In today’s economic environment of low crop prices and tight profit margins, cost minimization drives decision-making on the farm, especially when it comes to managing machinery.
“Machinery costs need to be top of mind anytime a producer is considering buying, selling or trading equipment,” says Iowa AgDirect Territory Manager, Chris Steinkamp. “Whether running a row crop operation or livestock entity, it’s important to analyze fixed costs and equipment utilization to make sound management decisions.”
Deciding when to repair, replace or retain farm equipment can mean a difference of thousands of dollars in annual production costs. Producers should consider each of these strategies carefully when evaluating their equipment investments.
Maintenance and repairs
Although routine maintenance is key to extending the ownership life of machinery, Steinkamp says mounting repair costs can quickly put a dent in a producer’s profitability.
“Producers don’t have the option to work on repairs at home like they used to with older machines. Servicing new high-tech equipment at the dealership comes with a hefty price tag, and if the machine is no longer under warranty, that’s when repair costs really start to add up,” he says.
To avoid profit losses from major repairs, Steinkamp recommends monitoring warranty coverage of high dollar equipment in the machinery line.
“Focus on assets like combines or tractors that undergo a lot of wear and tear,” Steinkamp says. “By keeping these bigger ticket items under warranty, producers can lower their risk of overspending on parts and labor expenses.”
There are many reasons producers choose to replace machinery. In addition to reducing maintenance and repair costs, other considerations may include reliability, pride of ownership, new technology, need for capacity and trends in the farm machinery market.
“Pride of ownership and the machinery market are playing less of a role today,” says Steinkamp. “It all goes back to cost minimization. Producers are justifying their replacement decisions based on their ability to minimize breakdowns, operate more efficiently and get more fieldwork done in a shorter amount of time.”
As noted in the Iowa State University Extension bulletin “Replacement Strategies for Farm Machinery”, three general replacement strategies producers can follow to minimize the long-run costs of owning and operating equipment include:
Replace frequently. Minimize the risk of breakdowns and costly repairs by trading key machinery items every year.
Replace something every year. Spend the same amount on new equipment each year to avoid a large cash outlay in any one year.
Replace when cash is available. Postpone major machinery purchases until a year when cash income is higher than average.
“Five years ago when cash was plentiful, producers were all-hands-on-deck purchasing new equipment, but as profits shrank so did buying activity using these replacement strategies,” Steinkamp adds.
A third strategy for reducing long-term equipment costs includes retaining ownership of the machine forever.
“When market conditions weakened, dealers trade differences got wider. As a result, many producers have been holding onto their equipment longer,” says Steinkamp.
While this option may not be the right fit for every producer, it does make sense for operators who have considerable flexibility in completing field work or who may benefit from keeping a secondary backup unit on the farm.
Before committing to repairs, replacement or retainment of farm equipment, Steinkamp says producers should also consider their financing options.
“There are a lot of options out there including long-term financing on equipment loans or long-term leases to help lower payments and free up cash flow. When it comes to financing ag equipment, it’s our job at AgDirect to help you make the right decision for your operation.”
Click to learn more about alternative options for acquiring machinery, locate your nearest AgDirect territory manager or contact the AgDirect Finance team at 888-525-9805.