Cost vs. Efficiency

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The use, benefit and importance of agricultural machinery continues to help farmers maximize their crop yield and food production. The future of farming depends on increased equipment technology to aid in making the process easier and more efficient. In the agriculture lending world, efficiency is always a topic.

Our agricultural lenders discussions around machinery efficiency includes:

• Updating equipment – is the warranty still in place? Will repairs and updates to the equipment need to be made? What are the depreciation schedules and remaining tax implications?

• Types of equipment – does the equipment have the horsepower and capability to match the land being farmed? Soil types? Irrigated vs. Non-irrigated?

• Labor – do the employees have the proper training and skills to operate the modern equipment? Should some custom spraying and harvesting be obtained using outside parties?

• Timeliness – does the farm have the equipment needed to work within the important windows of preparing the ground, planting and harvesting? Can fewer trips be made across the acres?

• Acres – does the farm have the acres needed to justify the types and cost of machinery? What is your equipment cost per acre?

• Environment – Fewer trips across the ground and less tillage aids in reduced erosion. Less tillage and fuel can have positive impacts on soil and air quality.

COVID and inventory/supply chains must be discussed when talking about farm machinery. The ag machinery industry has also felt the impacts of COVID. Farmers wanting to purchase equipment have had to wait up to a year. Many times, equipment is ordered to be manufactured, resulting in delayed purchases and future planning. The current backlogged demand for new equipment and elevated commodity prices has pushed the price of machinery higher for both new and used equipment. With the current rising interest rate environment, the delayed equipment purchases will continue to have an impact the farmer’s costs. We had multiple cases in 2021 when purchase orders were signed but equipment wasn’t delivered until mid-2022 resulting in higher finance rates. An important question for farmers to consider is does the efficiency and technology outweigh the cost of machinery?

When making plans for farm equipment needs, another important topic to consider is whether you should purchase or lease machinery. It is recommended you seek advice from your banker and/or Certified Public Accountant. Many factors should be considered when finding what works best for the situation, including taxes, insurance, warranty maintenance and repairs, as well as depreciation and resale/trade values.

Most producers choose to purchase. Machinery can be central to your business operations you use frequently and keep for an extended period of time. Purchasing machinery can also be effective in building equity. Equipment is an asset on your balance sheet and the depreciation can typically be used for tax purposes. 

Leasing can also be an option when equity or cash is not available to use for a down payment. Leasing is also considered if the equipment is only needed for a specific purpose or time period. The terms and lease payments are likely less than a down payment or finance charge. Leases can also have flexible terms and payments. Leases usually have hourly limits. Many leases have purchase options at the end of the leasing period that a lot of farmers opt for.

Chad Pittillo is Simmons Bank’s lending manager for Pine Bluff, Ark.

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