The last time I heard it, I was talking to an executive of a major farm machinery manufacturer. I won’t tell you his name because it could easily have been any other executive at almost any other manufacturer, but here’s what he said: “Farmers don’t buy what they need; they buy what they want.”
Just to be clear, this wasn’t this executive’s marketing strategy, trying to get farmers to buy glitz instead of guts. Rather, it was a statement of fact about the marketplace he works in.
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Too often, he said, the promise of getting more field work done in less time lures producers into purchasing more capacity than they really need, meaning they end up with models that are much bigger than necessary.
So, are those farmers getting good value for the extra money they spend?
The answer, according to a 2008 study done in conjunction with Alberta Agriculture and Rural Development (AARD), is probably not.
The study looked at 58 grain farms in Alberta and compared profit and productivity with overall investment levels. Even though the study didn’t focus solely on machinery, the findings challenge some common beliefs about it.
Perhaps most significantly, the study has found that your yard full of new equipment won’t necessarily make you more profitable and productive. “What makes a difference to production is management,” says Jonathan Small, a farm management consultant at Meyers, Norris Penny, who helped compile the study for AARD. “Put new machinery in the hands of a poor manager and he’ll continue to get poor results.”
Worse, it seems our machinery company executive knows what he’s talking about. “(Equipment) investment on-farm tends to be somewhat driven by cash and credit availability rather than a straight business decision that it’s time to replace a unit,” Small says. “We all know about iron addiction, and it’s not confined to farmers.”
That means too many producers decide to make equipment investments the same way most consumers approach automobile purchases, from an emotional state rather than cool business calculation.
In areas where farms generate more revenue, the study found investment in machinery tends to be higher, which seems to be the result of producers having the cash to afford it. So the question arises: what is the right level of investment? “There is a sweet spot,” says Small. And it varies by region.
As just one example, which can be replicated across the country, grain farmers in southern Saskatchewan invest a median $150 per acre on machinery. However, within the province that level can vary by as much as $25 up or down, depending on the area. East of Regina the amount tends to climb because the area’s higher rainfall produces larger yields, but also reduces the number of available days for getting field work done, thus putting greater demands on equipment and legitimately driving up investment needs.
Heading west from Regina, the rate drops off in the drier regions of the province as lighter yields and more days in the field have the opposite effect. In Alberta, where yields are higher still, the per-acre investment is typically about $250, and it can reach $300.
Generally, crop yields and profitability are the determining factors, and the appropriate investment level will vary all across the country depending on them. Consulting with a local farm management specialist will help determine the spend level for your operation.
Is it really time to buy?
The AARD study also probed whether how you manage your farm fleet can affect your bottom line. “We looked at farms and measured how rapidly they cycled through equipment,” Small says. They wanted to find out if there is any correlation between how fast your machinery is replaced and how productive and profitable you are.
“We didn’t find that,” Small says. “There’s really no apparent link in terms of production. And what we found was the additional costs of owning newer equipment — depreciation, cost of money and repairs — tended to more than offset any gains there might have been.”
This is where the true cost of buying machines that are bigger than necessary really adds up. “For every extra dollar — or any dollar — you invest in equipment, 25 cents will be added to your costs every year,” explains Small. “It hits you in three ways. The cost of the money to buy it, which is about five per cent; depreciation, about 15 per cent; and another five per cent on repairing it.”
But you might respond, wait a minute, new machinery doesn’t need much in the way of repairs.
Well, it turns out you’re both right and wrong. First, you’re right. “Repair costs, when expressed as a percentage of the FMV (fair market value) of the equipment, mostly fall in the range of five to 6.5 per cent irrespective of the rate at which equipment is replaced. In fact, the average in the sample is around 5.5 per cent.”
Yes, it’s true that a farm that runs brand new equipment with much of it under warranty, will have lower costs in this range when those costs are expressed as a percentage of the cost of the machinery. But you’re also wrong. Overall, the actual dollar outlay per acre is still higher.
Stubborn repair costs
There are a few possible explanations for why repair costs remain a relatively stable percentage. Fixing newer equipment, even if it breaks less often, is often simply more expensive and requires specially trained technicians. Repairs to older equipment can often be made right in the farm shop by the owner. As well, parts for older machines are more likely to be available from non-OEM sources and to be less expensive.
Small acknowledges keeping equipment costs under control is one of the biggest challenges facing producers. “After getting gross margins in line, the next thing you have to do is get your equipment costs in line,” Small says. “But it’s the hardest thing to do. You’re working against an emotional tug.”
Looking at excess capacity in equipment as an insurance policy to get through the challenging years may bring peace of mind to some, but it comes at a high price. And even though most farmers can remember coping with at least a few dramatic years of difficult weather, Small thinks there may be a tendency to remember them too vividly, which causes many to overestimate the value of the extra capacity they’re paying for.
The sweet spot
Cutting equipment investment to the bone isn’t the best choice either. Farmers still need to get the job done. If equipment isn’t reliable, farm productivity can suffer. That is especially true in seasons when there are narrow windows of good weather, leaving no room for downtime.
So you still need to aim for that sweet spot where there is the optimum balance between low cost on the one hand and sufficient capacity on the other.
Plus, the study supports the idea of boosting the reliability of some older equipment through comprehensive preventive maintenance. It makes good financial sense, especially when compared to the cost of replacing it with new machinery.
As farms expand and production methods change, though, there will be a time when older equipment just has to go. But deciding when to make the jump to bigger or newer models is difficult. If, for example, you have 15 per cent more acreage than you can properly harvest with an existing combine, does it make sense to buy another to get the work done, even if it means the farm would then have excess machinery investment going into the foreseeable future?
Small believes many farmers make the jump in capacity too soon. Instead, a better option may be to hire custom operators to take up the slack.
Or it may be time to test some of your basic assumptions. For instance, you may be able to speed up the existing combine in order to cover more ground more quickly.
Normally, this is dismissed. In fact, it sounds like heresy because it means you’re going to lose more grain out the back. At the very least, it sounds counterintuitive.
From a financial point of view, though, settling for less-than-perfect performance from a machine in order to stretch its capabilities can make perfect sense. “The saving in capital investment may far outweigh the loss, especially when grain prices are low,” says Small. “Fixed costs per acre aren’t really fixed. You can manage them, and the one you can manage most is farm equipment.”
Once you establish the ideal per-acre investment level for your region and operation, shooting for it requires a long-term approach. “It will go up and down over time,” says Small. “A good farm manager understands it’s a cyclical thing.” Having a five-year plan is the best bet, he says. “They ought to be visualizing that and keep it under review.”CG
