Equipment is as critical to running a successful dairy as the cows are. Items that qualify as a major equipment purchase can vary from farm to farm based on size. Typically that includes milking, feed mixing and storage equipment.
Manure management systems and the tractors needed to operate each system may also be considered major purchases. Precision technologies, such as activity and health monitoring systems, are becoming an increasingly popular equipment purchase on farms.
“… anything that you’re going to have to finance would be considered ‘major’ for your business and worth giving some thought to,” said Chris Laughton, director of Knowledge Exchange at Farm Credit East, ACA.
Financing is one way to classify whether an equipment purchase is a major investment. Another is to set a threshold dollar amount, say, $10,000 or more, Laughton said.
In either scenario, it depends on your operation’s situation.
“When buying new equipment it’s more than replacing something that is old or worn out,” said Matthew Haan, a dairy extension educator for Penn State University. “It’s more than looking at where the farm has been in the past; it’s about sizing new equipment appropriately for where the farm will be in the future,” he said.
Laughton and Haan offer guidance for planning upcoming major equipment purchases for your dairy.
All pieces of equipment have a lifespan. Whether it’s five years, 10 years or more depends on the type of machinery, the maintenance and workload. A tractor might last for 20 years if you’re only using it occasionally, or you could burn through it in less than five, if you’re putting a lot of hours on it.
Maintenance, repairs and associated downtime should be driving factors in the decision to purchase replacement equipment, Laughton said.
“If you’re spending anything close to what the payments on a new(er) unit would be on repairs, I would think about upgrading,” he said.
Think about the impact a piece of equipment has on the daily operation of your dairy. Is the unit “mission-critical” for your business? Would a new piece of equipment be safer or more efficient?
If the answer is “yes,” Laughton suggested upgrading sooner than later. “If the equipment brings savings or new capabilities to your business, then you need to evaluate those benefits,” he said.
Budgeting for replacement
Buying brand new or upgrading to a newer piece of equipment has financial implications for the farm. Haan encouraged farmers to complete a cash flow analysis to determine if the farm can afford the purchase.
“Know what you can afford and the lifespan of the equipment you’re looking to buy,” he said. “A financial analysis helps with that.”
During the process, ask yourself what, if any, additional income can this purchase generate for the farm? Also consider if the new equipment can eliminate or reduce other expenses. Weigh that against any additional costs the purchase might generate, such as a monthly payment or a change in insurance rates.
“Ask yourself what changes to my income will occur because of this purchase (if any),” Laughton said.
He also pointed out that it’s as important to consider the costs you expense through depreciation. “Consider what you are expensing in depreciation,” he said. “Depreciation is basically a monetary calculation of how fast your equipment (and facilities) are wearing out.”
You may not need to invest exactly the same amount you depreciate, but that figure can serve as a rough guide for some farms.
As the end of the year draws near, some farms decide to invest in equipment purchases for “tax purposes.”
“You may want to be cautious about this,” Laughton said. “Sometimes I see farms making major investments to get a Section 179 write-off or something similar, but make sure that these purchases aren’t a case of the ‘tail wagging the dog.'”
For example, it may cost more to purchase a new tractor than pay a higher rate of taxes. For some dairies it is more financially sound to pay a slightly higher tax rate than invest in a piece of equipment it cannot afford.
“Ideally, even if you are investing to offset tax liability, you should have thought things through ahead of time” and only make purchases strategic for your company, he said.
An optimal time to make investments in major equipment is during good financial years. Making investments and improvements during profitable years can help you get ahead of the curve during lean years, Haan said. At the same time, it’s important to think about the farm’s ability to make payments on major equipment purchases during an industry downturn.
Buying new vs. used
A major equipment purchase may mean a new piece of machinery or it may mean buying a newer, but used piece.
“New vs. used is always a debate,” Laughton said.
New machinery means there are typically fewer repairs and downtime. Plus you’re getting the latest technology. But you pay for that with a higher purchase price. The decision to buy new or used will largely depend on how big your farm is, how big the investment is and how much you plan to use it.
When financing, keep the following in mind. Equipment manufacturers may offer enticing financing packages on new units, including a low or zero rate of interest. These incentives may not turn out so great. You might pay a higher price for the unit than you would if you got your financing elsewhere.
“Don’t get me wrong – there can be some good offers, particularly in a slow sales period, but ask if taking the financing deal will affect the price of the unit,” he said.
Regardless of where you finance the equipment, do not finance equipment for longer than its expected useful life, Laughton said. If you do, you could end up in the unenviable position of having to still make payments on a unit that needs replacement. Plus in the later years of the financing window, typically when a warranty has expired, you may be facing increasing repair costs as well as payments. That makes that unit very expensive to own.
“If you can’t cash flow the finance payments for roughly two-thirds of the unit’s useful life, I would question whether that purchase makes sense,” he said.
Buying used can be a budget-friendly option, but it is not without its own complications. When buying a piece of previously owned equipment from a private seller, the seller must provide evidence of ownership, Laughton said.
An invoice or original bill of sale are good options. “Most people are honest, but you can’t assume a private seller always is,” he said. “Sometimes used equipment hasn’t been fully paid off, or worse, it may be stolen.”
It’s important that the seller disclose any liens against the equipment in writing. The documentation should include the loan payoff amounts. “If loan payoffs are required, the seller should provide information on the creditor, the amount(s) due and the manner in which the payoffs will be completed,” he added.
Some sellers may be unaware this step is necessary. Others may be dishonest and purposely fail to disclose this information. In either case, as the purchaser it’s best to ask about liens upfront.
In the April 2017 issue of Farm Credit East, there’s a document that offers detailed advice for successfully negotiating used equipment purchases from private sellers.
Asking for advice
Auctions, catalogs and internet searches can provide an overwhelming shopping list of options. Investing in new equipment is a long-term commitment. Asking for advice from others who use or observe machinery in use can provide helpful guidance during the shopping process.
Equipment dealers are well-versed in the latest features on any piece of equipment. Countless options are available on most pieces of equipment. Dealers can explain the pros and cons related to your farm and budget. These businesses also regularly accept used equipment on trade and likely have a selection of previously owned machinery to choose from.
Your farm’s nutritionist and veterinarian may also be able to offer insight on equipment: what works and what doesn’t. “Both have an opportunity to see what works and what doesn’t work during routine farm calls,” Haan said. “Ask for his/her opinion the next time they are out to visit.”
Similarly, local Extension educators visit a variety of nearby dairy farms. These individuals can share experiences that other farmers have had with certain types of equipment.
“Talk with neighboring farms and ask them what works well or what they wished they had done differently with an equipment purchase,” Haan suggested.
It may be time-consuming to ask multiple sources for advice, but doing your homework upfront should save time and money in the long run.
Dollars and cents
Purchasing a new(er) piece of equipment is necessary for any farm. Machinery wears out. Farms contract or expand and properly sized equipment maximizes efficiencies.
The equipment you’ll need for your farm will depend on its size and plans for the future. Often it will include milking, feed mixing and storage equipment. But manure management systems, tractors and health monitoring systems are all needed to run an efficient and profitable dairy farm.
Buying a major piece of equipment is a long-term investment. At the outset, it seems that making the purchase is a simple process, especially compared to other investments, like land. However, to be successful and benefit the dairy for years to come, it’s important to create a replacement plan, budget and know who you’re buying from.