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Remaining salvage value as a per cent of new list price

How much will that new tractor be worth when it comes time to sell it?

Remaining salvage value as a per cent of new list price

Call it the ‘cold weather blues’, but after my husband came into the house one -30 C day in late January cursing the old tractor yet again, I announced, “I’m going tractor shopping on Saturday. Coming?”

He gave me the look I get when he thinks I’m crazy, but he’s not sure he’s willing to risk saying it out loud.

Nothing more was said until Friday night when he said, “here’s the plan for tomorrow,” and he laid out the route map of dealers in our area that carry the type of tractor we need.

Need or want? That’s always a difficult question in country living, complicated further in our case by the fact that we live on an acreage and both have jobs in town. We move our own snow, we like to use round bales for the horses and we have mowing to do.

Let’s be clear. For us, tractor ownership isn’t about increasing the bottom line; it’s about time management and enabling our lifestyle choices. Horses are an expensive hobby, but so is camping, boating or snowmobiling.

That said, the decision matrix on replacing equipment is the same for farmers. It’s just that different criteria may get a different emphasis. The ROI is obviously more important to a farmer, as is the value of lost time during peak periods. For us, resale value loomed large.

Four years ago we invested in a Massey Super 90 purchased from the estate of a diesel mechanic who had lovingly restored it. It worked like a charm, at least initially. But as the years went by, it’s become clear that we aren’t able to give it the coddling it got from its previous owner. Our repair bills have mounted and its reliability has declined.

After all, this unit is old enough to qualify for the senior’s discount if we took it out for dinner; it has a right to be a bit cranky in cold weather.

Between the cost of acquisition and repairs we’ve put about $9,500 into a unit that has a market value of about $3,000 on a good day. Spread that over the four years we’ve owned the tractor and it has cost us about $1,300 a year — so far.

That’s the benchmark I was working with when we embarked on this journey.

The frustration factor

What value do you place on the frustration factor? My husband is mechanically inclined, but with a full-time job, his time for getting the jobs involving a tractor done around here is limited. He also likes to fish. So fixing old equipment in cold weather or ice fishing? Hmmm… tough choice. Not.

However, the upfront cost of buying something new or newer in the mid-sized utility tractor space is little hard to get your head around. In fact, our tractor shopping date that Saturday was a pretty sobering experience. To bring something newer than 20 years old onto the yard was going to cost us anywhere between $20,000 and $50,000.

But once you get over that take-a-deep-breath-and-move-on moment, it becomes about finding the right mix of power, capacity and price for what we want to do.

That’s where the math gets interesting.

Our criteria were pretty straightforward: we wanted a loader, the tractor needed to be big enough to run the snowblower we’ve been using on the Super 90, it needed a three-point hitch, and we wanted to be able to move bales weighing up to 1,200 pounds.

The resale equation

We hope to live where we are for the next 10 to 15 years. Whatever value left in a tractor we buy today when we go to sell it down the road will be a big factor in how much this investment actually costs us in the end. To my way of thinking, tying up some of our money into a hard asset that makes life easier isn’t a bad strategy when markets are bouncing up and down like a yo-yo thanks to Donald Trump.

One dealer hoping to sell us a brand-new tractor with orange paint said that when it comes to resale, “Look at your original invoice, take off the taxes, and that’s your asking price to start.”

I thought that was a bit optimistic. So I went hunting for advice on Google and turned up an analysis last updated in 2015 from Iowa State University (ISU) extension services, called “Estimating Farm Machinery Costs.” The numbers shown in the ISU analysis were originally developed by the American Association of Agriculture and Biological Engineers.

ISU offers a more conservative estimate than our dealer, complete with a chart estimating the salvage value of a used tractors in different horsepower ranges as a per cent of new purchase price over 20 years. As with cars, the owner of a new piece of shiny paint takes a big hit on depreciation as soon as they take if off the lot. But after that, tractors fare better on depreciation.

x photo: Iowa State University Extension and Outreach

I attempted to calculate how much the different options on our short list were going to cost us amortized over 10 years. Granted, these are back-of-of-the envelope calculations because I’ve had to estimate new purchase prices a decade from now when some of these units are already being replaced with new series by the manufacturers.

Nevertheless, the exercise did help inform our decision.

Our short list

Option One: Assuming two per cent inflation per year over 10 years, a $50,000 tractor purchased today with no huge leaps in technology would cost about $61,000 to buy new in 10 years. According to Iowa State University, the tractor purchased today (with 600 hours on it 10 years out) will be worth 30 per cent of that, or $18,000. That puts the annual cost of owning that tractor at around $3,200 per year.

Option Two: So what about a three-year old tractor priced at around $30,000 after some wheeling and dealing? According to ISU, that tractor’s actual value is about 54 per cent of its new purchase price, which I estimated at around $48,000 (equipped with a loader). Another 10 years out, its value rests around 25 per cent of the new purchase price, which by then, will be $58,000 (based on two per cent annual inflation.) That puts its re-sale value at around $14,500. Our annual cost in this case is about $1,300 per year — which is what we’ve been paying to keep the Super 90 running.

Option Three: We also looked at a 17-year-old tractor, which will make it 27 years old in 10 years. It was a little bit bigger tractor and in good shape. And as expected, it had the lowest sticker price of everything on our short list. I estimated the new purchase price on this tractor at $60,000 and applied the 20-year residual value of 18 per cent from the ISU chart to come up with $10,800.

We could have brought that tractor home for $22,000. So our annual cost for that acquisition would have been about $1,100 to $1,200. However, that’s assuming no major repairs or investments in tires, which on an older unit with higher hours is unrealistic. Besides, with the pace at which new technology is coming to market these days, that tractor at 30 years old might be more obsolete than our Super 90 is at 61.

Decision time

In the end, we opted for the second option — a 2016 Kubota M5660SU, which still has some warranty and which should do all the jobs we ask of it. According to the ISU estimates, we still paid too much for it, so I suspect actual resale on these units is somewhere between what the dealer told me and ISU’s estimates.

Based on what I’ve seen, these utility tractors tend to punch above their weight in the resale market because they’re just so darned handy. Of course, the paint colour also matters in some markets. We still think we’re getting reasonably good value based on the condition of this tractor and its low hours.

Of course, nothing is guaranteed, even with newer equipment. And I haven’t included the cost of borrowing.

But if it costs us an extra $200 to $400 a year to reduce or eliminate the frustration factor, we can easily make that up in lower feed costs and a few feeds of walleye.

About the author

Vice-President of Content

Laura Rance

Laura Rance is vice-president of content for Glacier FarmMedia. She can be reached at [email protected]



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