When considering whether or not it pays to buy new equipment, James Fehr, vice-president, commercial financial services, agri-business and Agassiz market at RBC, said “You need to assess what income the equipment generates verses the expense of operating it.”
When it comes to deciding whether or not to buy new machinery, Fehr says, “These decisions are very specific to operations and need to be made with farmers’ financial records in mind.”
“The key principle to consider is ‘does the equipment pay for itself, or will you need to add from other operations to pay for it?’ If you need other income sources to pay for the equipment, is that sustainable for your operation?”
There are non-traditional factors today’s farmers should consider when making such decisions.
Production Decisions: “Production-related decisions to purchase equipment happen when the new piece is able to provide variable rate application (seed, fertilizer, etc.), or when it can provide key data like yield monitoring, which may provide financial returns in saving inputs,” said Fehr.
Staffing: Many farmers have a hard time finding staff, especially at peak times. Fehr says, new technology doesn’t just allow you to use fewer staff, but when you add GPS and auto-steer, can allow staff to perform at a higher level due to less fatigue.
Fuel efficiencies: With the high cost of fuel, Fehr says, “Fuel efficiencies are a more important factor of operations today than in the past.”
Purchase savings: Farmers can sometimes access discounts from machinery dealerships when they purchase more than one piece of equipment in a short time frame.
Making the decision
Overall, determining factors for equipment buying, according to Fehr, should include “cost of purchase, resale value, cost of operation, staffing equipment, and technological advances of the existing versus new equipment.
“From a business perspective, equipment is owned/leased as a means to an end, and therefore has a net return on the investment.”
Kelvin Shultz of Wheatland Accounting Services Ltd. at Fillmore, Sask., would “cautiously say investment in machinery often pays for itself.”
“It’s very important to ensure equipment investment pays for itself,” said Shultz. “The capital required to be invested in farm machinery now is a very substantial portion of the total farm overhead capital.
“After land, equipment would normally be the second highest, and, in some cases, the highest investment category on a modern farm.
“A farm manager will want to be equipped to successfully complete farming operations in a timely manner; but care needs to be taken that the farm not be over equipped. It’s a real balancing act.”
Doing the math
Shultz suggested it is helpful to look at this formula: “Current equipment investment (market value) per acre divided by gross revenue per acre.” That is, the market value of your machinery divided by your total sales for the year.
“Alberta Agriculture indicated in that province the average ratio from 1998 to 2011 was 1.69. Ted Nibourg of Albert Agriculture suggested a grain farm with a ratio over two and a livestock operation ratio over one may be a concern.”
Rather than just looking at last years sales, Schultz suggests taking some time to estimate your farm’s gross revenue: “When calculating the gross revenue per acre, it’s good to anticipate future prices, calculating according to what could be expected in good market and growing conditions, then what could be expected in poor markets and growing conditions, and then pick a level that you’re comfortable with.”
Don’t forget to add a dose of realism. “Experience tells us prices fluctuate drastically and the investment will also need to survive the low price and production scenario.”
What if the formula says you’re over-invested? “Alternatives would be to rent more land to spread out those costs or to consider selling or downsizing underused equipment. If a piece of equipment is underused, it might be able to be replaced by renting or sharing it with a neighbour or family member or by getting the operation custom done.”
Another way of controlling equipment overhead investment per acre is to purchase good used equipment as opposed to brand new equipment, conveyed Shultz, cautioning “but that can lead to higher repair costs and some downtime at crucial times.
“Capital Cost Allowance [depreciation] on equipment is a tax saving, but, in my opinion, the decision to purchase the equipment needs to be for business reasons. It could easily lead to being over equipped if the primary driving decision factor is minimizing tax.”
Shultz anticipates that “machinery will continue to be a major investment. Technology will continue to increase the functionality and efficiency of machines and the trend will also continue, as it has in the past, toward larger equipment.” †