Looking across the U.S. farming landscape, machinery and equipment represent one of the agriculture industry’s most significant expenses.
For individual farmers, decisions about machinery and equipment are quite often their most financially-impacting.
Making equipment decisions may appear daunting, but the good news is that farmers have several sound options when considering farm equipment needs. Given our particular line of business, the conversations we have with farmers revolve around their decision to own or rent harvest equipment (combines).
The short answer? It depends.
Every producer has a different situation which affects the decision-making process on whether renting or purchasing provides more benefits. Over the 12 years MachineryLink has been in business, we’ve seen the trend move toward renting as the cost of new or even used machines continues to grow.
You will see this trend consistently across industries with high-dollar, relatively low-utilization equipment whether combines, private jets, or construction equipment. We like to compare it to the construction industry — think excavator for a pipeline company which only needs the heavy equipment for a part of a project at a particular time.
The construction industry has been operating under the rent vs. ownership model for many years, and in farming, smart farmers are adopting the same philosophy.
When farmers try to determine whether to rent or purchase, we advise them to understand the true economics of ownership by looking at independent economic assessments produced by universities such as Iowa State, Kansas State, and others.
In addition, we advise them to approach the decision with several considerations in mind:
• Priorities for your cash or capital;
• Tax implications;
• Acreage and harvest equipment efficiency/usage;
Priorities for your cash or capital
Harvest equipment is typically the most expensive and least utilized on the farm. Depending on the size of the farm and the type of combine that will best suit you, the list price of a new combine can range anywhere from $280,000 for a bare bones machine to over a half-a-million for a new, fully loaded machine.
Other ownership expenses
In addition to the equipment itself, cost of ownership includes maintenance and repair, winter storage, insurance, and property taxes. If you have not properly planned for these additional costs associated with ownership, they can potentially exhaust your capital reserves.
Larger farmers that more fully utilize their current machine may see fewer advantages to renting, but as their farm size increases, many choose to add additional capacity with a rental machine.
Even when the economics are considered less advantageous, there are still better ways to deploy capital in investments that appreciate in value versus depreciate, such as the combine.
All businesses have a limit to the amount of capital they can deploy. Farmers should ask themselves — Is a combine the best use of my capital, or are there other more pressing or better uses? Some of those uses can include assets that will appreciate, rather than depreciate, such as more advanced farming technology which can increase your productivity and efficiency, grain handling or storage, additional land, or equipment that is more fully utilized, such as tractors.
The deciding factor we hear most often when farmers decide to rent rather than purchase is the cash and cost savings.
As a general rule, renting is significantly less per acre than owning, sometimes offering a 15-50 percent savings over the total cost of ownership.
Renting provides substantial cash flow benefits, especially in the first year when a purchase down payment plus loan payments can put a serious dent in available cash and/or reserves. It offers predictable costs with no surprises.
A rental model frees the farmer from concerns over catastrophic failures and ongoing maintenance headaches. The most economic harvest solution that incorporates the latest, most advanced combine without the overwhelming cost of purchasing a high-end machine is a rental model that benefits from much higher utilization of these expensive assets than a farmer can get on his own.
Tax rules such as Section 179 and bonus depreciation enable you to deduct a sizable amount for farm equipment purchases. Despite the tax advantages of ownership made possible by IRS accelerated depreciation rules (MACRS and Section 179), producers should keep in mind that the benefit is limited to the time value of money
The net tax deduction over the ownership period on the machine is ultimately limited to the depreciation on that machine — nothing more, nothing less
We find producers are often surprised on this important point. When the producer sells the machine, he will face a tax hit from the depreciation recapture rules of the IRS (recapture can be avoided in a like-kind exchange but the accelerated depreciation benefit on the replacement machine is greatly reduced).
For a producer spending $325,000 on a Class 7 combine that he plans to use for 5 years, the accelerated depreciation tax benefit of MACRS equates to only a 3-4 percent improvement in the cost of ownership. With Section 179, that benefit can jump to 10-12 percent which, while meaningful, is generally not enough to offset the lower cost of renting.
Rent payments will continue to be 100 percent deductible as ordinary operating expenses. We always suggest that farmers consult with their accountants when negotiating their purchases to ensure that they are viewing it from the perspective of their entire holdings and the planned use of the asset.
Given that the savings from a combine rental approach over time generally eclipses the after tax cost of ownership, we encourage producers to leverage section 179 deductions on other assets.
Acreage and harvest equipment efficiency/usage
A newer combine will likely be much more efficient than an aging one, and renting affords you the opportunity to take advantage of that benefit at a relatively low cost. In fact, last season, one of our customers in Texas replaced the combine he owned with a rental combine from us and was able to reduce his harvest cycle time from 30 days to 19.
Information key to decision-making
Whether shopping to buy or rent, or undecided, the more knowledgeable you are about your current utilization/efficiency and the cost of your production, the more informed decision you will make. In the case of renting, this information helps you better structure an agreement for an appropriate level of utilization (number of hours) for your farm.
Utilization should be one of your key data points when looking at whether to rent or buy combines. As every farmer knows, although it represents one of the most sizeable farm expenses, a combine is the least utilized of all farm machinery with a utilization rate of about 7 percent a year.
Many farmers — even those whose acreage warrants purchase consideration — don’t feel the price is justified for a machine that sits in their barn the majority of the year, and consequently decide to rent and use the available capital in other areas of their business.
In the event of crop loss, a rental solution carries a lesser burden than ownership. If you financed the combine, your dealer would not stop your lease payments, and the combine still depreciates in value even though it is not used.
Producers sometime forget that the combine they own depreciates each year whether they use it or not. Thus, they are paying an economic price even in years they don’t need their machine due to crop failure.
Today’s farm machinery has the technological capabilities to deliver unprecedented information about everything from grain yields to soil composition to optimum planting — all of which take the notion of precision farming to a new level and enable farmers to be more efficient and thus more profitable.
We find that many farmers are exceptionally savvy at learning how to best use the available technology to their efficiency and productivity advantage. From this technology perspective, rental is a pretty clear winner over purchase.
As an example, we talk a lot with our customers about the notion of “smarter harvest” — trying to help them with their businesses from a macro level as opposed to simply renting a combine to them.
In support of that, we offer our data analytics platform, FarmLink Analytics, which provides current information to help make better grain marketing decisions. The platform includes weather, yield, and basis information — data points enabling farmers to make better, more informed decisions on when to sell their grain.
In conclusion, there are clearly many variables that go into making major equipment decisions, and there are advantages to both renting and purchasing.
If you arm yourself with information, clearly understand the pros and cons of your possibilities, and vet them against your specific situation, you will undoubtedly make a smart decision for your farm.