With price tags on the largest, fully equipped combines now topping a cool half-million, farmers are looking for strategies to reduce their equipment costs.
The obvious solution may not be the best, however. Buying a lower-quality machine or a high-hour used machine may actually cost you more in increased repair costs and lower productivity than you save up front.
A second option can also have big negatives. Hiring a custom operator is fine when it works out. But as we know, it doesn’t always work out. Success is largely determined by the quality of the operator and by their availability when you need them, but you also have the worry of whether you can rely on someone else to keep your best interests at heart. Concerns over transfer of disease and weeds between farms by custom operators are also increasing.
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Leasing or renting harvest equipment is a third option but the high cost of equipment and the relatively short harvest season has led to limited rental capacity.
Now, ag economist Jared Wolfley has identified a fourth strategy and written a doctoral thesis at Cornell about it called Machinery-Sharing Contractual Issues and Impacts on Cash Flow of Agribusinesses. Wolfley used a simulation model to identify the actual cash flow impacts of Texas and/or Colorado and/or Montana farmers sharing a combine instead of each having their own machine.
In each of the cases he studied, Wolfley found that sharing a combine reduced risk. That even includes when the sharing was between two farms in the same area — although the benefits do decrease when the harvest periods overlap.
However, Wolfley also found contractual issues that are often overlooked but that must be ironed out ahead of time if co-ownership is going to work. These include machinery sizing, percentage of ownership costs paid by each farm operation, depreciation, and penalties for late delivery of the combine to the co-owner.
A share agreement does not have to be a 50/50 split of all costs. For example, Wolfley says, differences in financial status of two farm operations may prompt a different split to enable one farm to capture a greater portion of the depreciation allowance thereby giving both farms a greater net cash benefit from co-ownership.
For the past 12 years Don Cantrell of Merna, Nebraska has shared ownership of a combine with an Idaho farmer he met at a farm management meeting for top producers at Texas A&M University. Both had similar farm operations, had the same attitude about equipment ownership, maintenance, and operation, and both were seeking a way to reduce their harvesting costs yet still run a new combine each year.
The fact that the harvest season differs between Idaho and Nebraska presented an opportunity. “We created a limited liability company and each contributed $9,000 for the down payment on a new John Deere combine. We financed and insured the combine through John Deere and split the trucking costs between farms 50/50. Each fall, after harvest is completed, we trade for a new combine with the cost of the trade pro-rated on the hours each person has used the machine for,” Cantrell explains.
Cantrell tells me the strategy has worked very well. He calculates that he has saved $20 to $50 per cylinder hour compared to the cost of hiring a custom operator.
Plus, Cantrell gets to operate a new combine every fall, with new technology, increases in capacity, and lower risk of breakdowns. “This is now the 12th combine I have shared through our LLC.”
Danny Klinefelter, economist at Texas A&M says the success of equipment sharing between two producers hinges on a number of factors in addition to the difference in harvest timing.
“There have to be agreements made on how costs are shared, the hours of use, maintenance practices, how and when it is delivered between farms, condition upon delivery (delivered clean), insurance, quality of operator who will be running it, and how the trade-in of the equipment is handled,” Klinefelter says.
Other potential issues need to be worked out too. For instance, what happens if one of the partners significantly increases or decreases their crop size after signing the agreement?
Klinefelter says farmers who share equipment are often those who want to trade for a new machine every year. Sharing equipment allows them to put twice as many hours on the equipment compared to if they owned it themselves.
He also notes this strategy is more often adopted by farmers running more than one combine. Such farmers will own one combine on their own and then co-own the second and even a third. Complete ownership of the first combine reduces the risk of crop losses if the shared combine isn’t delivered in time for the start of harvest.
Klinefelter is also noticing an increase in a sharing of labour amongst farmers who share equipment. For example, a farmer in Montana who shares ownership of a combine with a Texas farmer may go to Texas to help with the harvest there, and in turn the Texas farmer travels to Montana for that harvest. Or in other cases, a hired man may travel with the combine and operate it on both farms.
“The most important and difficult part of equipment sharing is to find someone to share ownership with,” stresses Klinefelter. “You can’t simply put an ad in the paper.”
Search out potential partners at management seminars or at meetings of top producers that such growers attend year after year, Klinefelter says. “You have to know who you are going to go into business with.” CG
