farmgate: Farm Equipment: Should You Own, Rent, Lease, Or Hire A Custom Operator?
You were one of the hundreds of thousands of Cornbelt farmers who attended the 2009 Farm Progress Show, and you saw a (insert piece of farm equipment) that you really want. It will help you become more efficient. It will make you more productive and capable of farming more acreage. You have some equity accumulated from 2007 and 2008 commodity sales, but do you really want to deplete your savings in a year when profitability will be slim, or even negative. What choices do you have?
Whether you have your eyes on a new combine, tractor, planter, tillage tool, or something else, Iowa State University agricultural economist William Edwards wants you to ask yourself some fundamental questions that will help you determine your approach to acquiring that piece of machinery. His recent newsletter summarizes the alternatives and his suggested questions include:
• How much will it cost to own and operate an item of machinery?
• What other ways are available for you to acquire the machine's services? What are their expected costs?
• How much capital will you need if you purchase the machine? Can you afford that much investment? Can capital be used more profitably in other areas of your farm business?
• What are the income tax advantages of each method? What is your own tax situation?
• Do you have the ability, tools, and labor to operate the machine and maintain it?
• Are current technological developments likely to make the machine obsolete in the near future?
• Are you likely to change production practices or farm size in the near future and no longer need this type or size of machine?
Your answers to these questions will help determine whether you should own, lease, or rent equipment, or hire the work done by a custom operator.
Ownership can be either individual or jointly owning equipment with someone else; and ownership is the most popular method of controlling farm equipment. It does what you make it do and are responsible if it does not achieve that objective. But the initial responsibility is paying for it, whether it is cash or financed. Edwards says a partner can help with the financial affairs, as well as maintenance and repairs, but you have to agree with each other about when, where, and how the equipment is going to be maintained and utilized, in addition to having an ownership agreement that addresses dissolving the relationship. Ownership gives you the opportunity to buy used equipment when either resources are diminished or use will be infrequent. Older equipment may require more maintenance and those costs should be budgeted.
A form of ownership is exchange of labor and equipment. Your planter may serve both farms and your neighbors combine may serve both farms, and such an arrangement will require agreements on timing, responsibility for repairs, and equitable use.
Rental of equipment is usually for a short time and charges may be for a specific time period or acreage. You have the responsibility for maintenance, insurance, and complete operational costs. Edwards suggests that rental would be appropriate for:
• Expensive equipment such as a grain drill needed for only a short period each year.
• Supplementing equipment when only short weather windows were open.
• Testing new technology before deciding whether to buy.
Leasing equipment covers a longer period of time and gives you complete control and responsibility for the equipment, with the choice of returning it to a dealership or purchasing it. An operating lease usually requires an annual or semi-annual payment, with the choice of purchase at the end of the lease period for its fair market value. A finance or capital lease considers you the owner of the equipment with the capacity for depreciating it. Leases require you to pay any taxes, insurance, and repairs. Edwards says leasing is a hedge against inflation since payments are known in advance, and lease payments may be less than loan payments if the purchase is being financed.
Custom hire brings an operator with the equipment, who is responsibility for maintenance and complete operation. There is no long term capital commitment, such as financing or lease payments, and the custom hire rate should be established in advance. It is particularly useful for specialized equipment that is used infrequently and would be too expensive to own and store. The downside to custom hiring is the availability of the equipment when you want and need it.
One of the major issues that may help determine your choice of machinery acquisition is the tax consequences, such as depreciation or the deductibility of lease payments.
Summary:
Farming requires either ownership of equipment or the ability to acquire equipment when it is needed and at a reasonable cost. The choice of ownership versus leases and rental agreements may boil down to tax considerations, as well as the need to keep your equipment technology at an economical point.
Posted by Stu Ellis on October 5, 2009 12:23 AM to farmgate