When times are good, farmers are more apt to finance new ag equipment or update their existing machinery. Ag equipment financing is a complex decision and there are many factors that go into it: your working capital position, the amount of acres you have and the length of the planting or harvest season.
The Cost of Labor
The employees you need are directly tied to the ag equipment you have. An extra combine means your operation needs an additional driver and maybe an additional tractor and cart and semi or two with each needing an operator. Too much or underutilized financed ag equipment will have a trickledown effect and result in your operation spending more than necessary. While labor costs will be present on the farm income statement, the cost of unnecessary labor will not be stated. Think of capital as finite. Every dollar you invest in financing ag equipment and labor is a dollar that can’t be invested in land or other assets, or used to build working capital.
What to Consider Before Financing Ag Equipment
Fortunately, there are many ratios which can be used as a general guide to help you plan for the labor impacts of financing ag equipment. Depending on the kind of operation you own, these ratios can be based on how many head of cattle you have, the bushels your operation produces, etc. In addition to standard labor models, there are a few other questions you may want to consider: Does my operation need all the ag equipment it has? Is the operation making enough net income to support all the family members currently working on it? Are there ways production could be more efficient that could ultimately reduce labor needs? If you haven’t done so, it may be worth investing in a workflow software that can help with more efficient tilling, planting and harvesting. Any labor-related question can be a tough call for any farmer, but if margins continue to tighten, it is worth reassessing.
Evaluate Ag Equipment Versatility and Lifecycle
Before financing, consider how versatile the ag equipment is across different tasks and seasons. Multi-purpose machinery that can be used for throughout the year, or across various crop types, may offer better returns on investment. Also, assess the expected lifespan of the your financed ag equipment and how it aligns with your long-term operational goals. Financing a piece of ag equipment that becomes obsolete or underused in a few years can strain your budget and reduce overall efficiency.
Consult Your Trusted Advisors
It’s also wise to consult with the people you trust who understand the ins and outs of your operation. They can help you analyze your current ag equipment usage, labor allocation, and financial standing to determine whether financing new machinery is the right move. A well-informed decision can help you avoid overextending your resources and ensure that every dollar spent contributes to the sustainability and profitability of your farm.
If you’re only accounting for the cost of principal payments and interest when determining ag equipment financing, you are missing out on the larger affects on your operation's bottom line. Make sure the ag equipment you plan to finance is truly necessary for your operation, or you may find hidden labor costs making a dent in your farm’s balance sheet.
Looking to learn more about the different equipment financing options that Farm Credit Mid-America offers? Connect with our team today and apply for a loan to get started.
Loans subject to credit approval. Additional terms and conditions may apply. Farm Credit Mid-America is an equal opportunity lender.
