When buying equipment, affordability is not the only consideration

Is this the year to upgrade your high-clearance sprayer, trade in the truck or buy a new combine? If questions like these have you tossing and turning, try attaching numbers to the pros and cons of the decision, says Darren Bond, a farm management specialist with Manitoba Agriculture — and be honest about how you compute the benefits.

“For some producers, the final choice comes down to the comfort of owning nicer equipment,” says Bond. “That’s not necessarily wrong, but the picture is incomplete. Let’s be honest: we can convince ourselves of anything if we want to. And that’s not limited to farming, that’s human nature.”

Darren Bond

Bond suggests producers avoid thinking of major farm purchases in terms of what they can afford to spend or borrow. Instead, break the calculation into four parts: savings, income, risk tolerance and weakness. Savings can come in many forms, but are commonly found in greater efficiencies. “We often advise our producers to try to monetize the benefits,” he says. “I talked to a producer recently who made a significant investment in seeding equipment. In so doing, he eliminated a few tillage passes. He arrived at the decision to buy the equipment by calculating the cost savings in those passes.”

It also makes sense to think about how equipment upgrades can generate more income. Ten years ago, high clearance sprayers were the domain of custom applicators. That changed as farmers calculated the production benefits of optimizing spray operations. “Timely spray applications have led to increased yields, which has led to more revenue, more income,” says Bond.

Thinking about savings and income sets the foundation for discussing risk tolerance, which should include your tolerance for debt versus operational downtime. For instance, some farmers are good at troubleshooting the mechanical breakdowns that are common with older equipment. “Maybe your strengths are in marketing or bookkeeping, but not twisting wrenches. It’s good to know that,” explains Bond.

Assess operational weaknesses by asking yourself some questions such as: Where do I need to invest more money? Is it in seeding? What about spraying or harvest? Bond talked to one producer who used this approach to figure out the weak link in his harvest operation. “It turned out the bottleneck was in the yard, not the field,” he says. “He spent money on a high-capacity auger. It sped up harvest and he didn’t need a new combine.”

COST VERSUS BENEFIT

Danny LeRoy is an associate professor of agricultural economics at the University of Lethbridge. He assumes producers are conducting cost-benefit analyses before buying new equipment. “No highway contractor is bidding on a contract to move snow without knowing the cost per mile of operating his equipment,” he says.

Dan LeRoy

But beyond that, LeRoy wants farmers to think about the second-best use of that money. “What could you buy if you didn’t buy the new combine,” he says. “There’s no such thing as a costless choice. You are sacrificing something to buy more land, a new piece of equipment or to put up a new building. There’s always a next-best alternative for financial resources. People should have a very good idea of what that sacrifice is.”

Every farm faces a different set of choices, says LeRoy. “Some farms are highly leveraged. Ask yourself, is the best use of scarce resources to buy brand new paint? Or should I be paying down debt?”

Bond says the best cost-benefit analysis should go beyond cost per acre or per hour by shifting to a focus on profit. “Think in terms of cost per bushel sold or pound sold, depending on whatever product you’re growing or selling,” he says, adding that these numbers give producers a better idea of how an equipment purchase or lease will impact a farm’s bottom line.

He says the goal is to put your farm in a stronger, more resilient position to face what lies ahead. Last year had a lot of challenges and no one knows what’s going to happen this year, says Bond. “We always have to prioritize what we need and want. There could be eight things you want to do with the business, and money for four.”

WHAT ABOUT THAT TAX INCENTIVE?

The Accelerated Investment Incentive, a federal government program, has put the tax implications of purchasing new equipment on par with leasing equipment, and that can be very seductive.

Colin Miller

“But let’s not make equipment purchases based on tax,” says farm tax guru Colin Miller, a CPA with KPMG. “I tell people to run the numbers because every deal is different. The fees charged, the financing, the interest rates; the details can be hard to pull out from a lease agreement but you’ve got to figure it out. There’s no quick rule of thumb on this.”

He says to talk to your tax professional before a major equipment purchase or lease to make sure your numbers add up. Plus, your tax advisor can also help you keep cash in your pocket while planning for the farm’s future. Indeed, the goal lines shift depending on how close you are to putting a business succession plan in place. The next generation might not want to buy your equipment, you might not want to gift it and there are tax implications for both. “There’s a lot to be mindful of,” says Miller. FF

Link to Accelerated Investment Incentive farm machinery cost calculators

Accelerated Investment Incentive:
www.farmforum.ca/investmentincentive

Farm machinery cost calculators:

www.farmforum.ca/ABmachinerycostcalculator

www.farmforum.ca/ONmachinerycostcalculator