Machinery Management

Farm machinery and equipment are essential to the operation of most farm and ranch businesses. U.S. farm machinery and equipment are currently valued at nearly $75 billion, ranking only behind farmland as the most valuable asset in U.S. agricultural operations.

Agriculture is one of only a few industries that uses such capital-intensive machinery for such short periods of time. It is not uncommon for farmers to own combines valued at $60,000 or more, yet use them for only 12-15 hours per day for 10-20 days per year. Such large expenditures appear to be justified because of the potential for high losses from a late harvest.

In some countries, such as Argentina, land holdings are large and expensive capital assets are used round the clock during critical planting and harvesting seasons. This helps lower per acre costs and makes the farming operation more cost competitive.

Proper machinery management can improve the efficiency of farming operations and, thereby, increase the incomes of agricultural producers. When making machinery management decisions, the farm manager needs to consider capacity, ownership and control, maintenance, and replacement.

Capacity

To determine a farm's optimal machinery capacity, the farm manager needs to know the acreage of each crop to be produced; the tillage, planting, and harvesting operations; costs of various types and sizes of machinery; labor costs; and the costs of untimely operations.

Determining optimal capacity is not an easy task. The decisionmaking process is complex. A number of decision-aid tools are available through the Cooperative Extension Service and private software vendors. In recent years, microcomputer programs for selecting farm machinery have been developed at a number of universities. These programs offer valuable assistance in determining optimal capacity.

Ownership and Control

A critical decision faced by the farm manager is how best to control the use of farm machinery and equipment. Control alternatives include purchase, joint ownership, financial lease, operating lease, and custom hire. Each alternative has advantages and disadvantages; no alternative is likely to be best for all situations. The astute manager needs to determine which alternative is best for his or her own operation.

Purchase. The most common method of acquiring farm machinery and equipment is to purchase it. The benefit of purchasing is that the owner has complete control over use of the equipment; however, the owner also has complete responsibility for the equipment's maintenance. Before purchasing, the farm manager should determine whether the farming operation can support the purchase with cash or borrowed funds. If so, the manager should seek the most satisfactory financing arrangement.

Joint Ownership. One method of reducing machinery and equipment costs is joint ownership. Joint ownership is most common among relatives or close acquaintances. A successful joint ownership is dependent on a clear and documented understanding of each owner's rights and responsibilities. The time the machinery is available to each party, who is responsible for maintenance and storage, and compensation agreements (if one party uses the machinery more than originally planned), should be determined and put in writing before the purchase is made.

Financial Lease. Another method of controlling the use of machinery is through a financial lease a long-term contract in which the farmer has exclusive use of the machinery over a significant portion of its useful life. Financial leases were once motivated by tax considerations. However, tax incentives for financial leasing have been reduced. Financial leasing now appears to be attractive because of the implied fixed rate of interest as a part of the lease agreement (as opposed to a variable interest rate loan for a purchase with borrowed funds) and because the upfront cash needed to lease may be less than the upfront cash needed to purchase. Financial lease contracts are commonly available on big-ticket items such as combines, tractors, and irrigation equipment.

Operating Lease. An operating lease is an arrangement whereby a producer can rent equipment on a short-term basis hourly, weekly, or monthly. An advantage of an operating lease is that high-cost equipment needed for a short time period can be made available at a lower cost than ownership. A disadvantage is that equipment may not be available when needed. Transporting the equipment may also be inefficient and time-consuming.

Custom Hiring. Custom hiring can be a good choice when you need high-cost or specialized equipment fora short period. By offering services to many farmers, custom operators can spread the cost of machinery and equipment over many acres. For example, some custom combine operators start in Texas and follow the wheat harvest north to Canada. Custom hiring also can be attractive if labor is scarce. Farmers with excess machinery capacity may find it profitable to offer custom services to others who may lack adequate machinery capacity.

This prototype kenaf harvester, specially designed to cut whole kenaf stalks into 12-foot lengths and place them in windrows, was built mainly from combine parts readily available from local farm equipment dealers. (USDA Photo by Ron Nichols, 88BW1890-8)

Which Option Is Best?

Three criteria can be used to determine which method of controlling machinery and equipment is best fora particular operation cash-flow feasibility, capital debt repayment capacity, and net present value.

Cash-Flow Feasibility. Cash-flow feasibility tells a manager whether the farming operation is generating a sufficient amount of cash to meet the payments required by a given acquisition method. For example, it may be better from a profit standpoint to purchase a combine rather than to lease it. But if the purchase requires a large cash down payment, it may not be feasible from a cash-flow perspective. The cash down payment may deplete operating capital or funds needed for other business decisions. A cash-flow projection can be used to help evaluate cash-flows under each acquisition method.