Owning every tractor and implement you need in the field may be the conventional approach to managing a machinery lineup. Sometimes, though, hiring fieldwork on a custom basis can be a viable, more cost-efficient alternative to outright ownership. In general, both strategies have pros and cons – which one works best for you depends on a few key variables.
“It’s very easy to justify both sides of the decision,” says Scott Welden, AgDirect Territory Manager based in Jonesville, Michigan. “Equipment today is becoming very specialized. It’s a balancing act to optimize the use of your resources, capital, labor and time. Those factors all determine whether somebody should own or lease equipment versus hire fieldwork done.”
A cost comparison is the basis to gauge whether you should buy a piece of machinery or find someone who will do the job for you. But, that comparison needs to account for more than just the sticker price and how much you’ll use it. Hidden costs that may not be apparent at first glance – costs like cash flow, trade-in value variables and costs for associated equipment – should be accounted for in determining which strategy is right for your farm, according to Welden.
“There’s a ripple effect: Some equipment is dependent on other equipment. The owner of a sprayer, for example, might at first overlook the fact he needs a nurse truck and trailer, too. He will have to spend additional capital on that infrastructure to maximize the utility of that sprayer,” Welden says. “And if you need an operator with a restricted-use pesticide license to handle those products, there’s a cost to that, as well. Some growers choose not to get certified, so they’re going to hire that custom applicator because he’s qualified and the grower isn’t.”
Cash Flow Considerations
In other cases, cash flow – which can fluctuate a lot depending on the time of the year for some operations – could be a major deciding factor. For example, a custom fieldwork operation may occur during a time of year when cash is tight. In this scenario, the cost of paying a custom operator during the growing season may be more financially burdensome than paying the same amount or more to purchase the equipment and defer payment to a later date. The implications to financing at a later time when cash flow is stronger may outweigh any potential increase in total cost.
“You may have the money to buy inputs, but hiring somebody to custom spray and pay for it in July might not work with today’s cash flow. But, you could buy a sprayer and defer the payments to December,” Welden says. “That allows you to use the equipment during a time of cash flow tightness and delay payment versus paying at the time of service. Cash flow is a big factor and sometimes can be very, very critical. With AgDirect, our flexibility with payment options and annual installments is very helpful.”
Look ‘Underneath The Financial Statement’
Examples like these underscore the need to closely examine your machinery needs and the costs to best meet those needs before you make a decision whether to buy or use custom work. Welden recommends to look “underneath the financial statement” to throw light on the factors that can impact your operation’s financial health in both cases.
“The savvy operators always seem to make the right decisions because they see beyond the financial statement to the ‘other things’ that can impact their financials at the end of the day – things like accelerated depreciation or lost capital. So, what’s the best choice between buy, lease or custom hire? It really depends on each operation and its best use to generate the highest return on investment,” he says. “It’s all about asset utilization and using it to its fullest extent – optimizing resources, money and human capital.”