Farmers hoping to stay up-to-date with new, practical technologies are increasingly turning away from purchasing farm machinery outright. Instead, they are opting for the cash-flow and technological flexibility afforded through leasing.
As input, land, and machinery costs continue to rise (seemingly indefinitely), equipment leasing is particularly attractive for the next generation as it works to modernise the farm.
For Matt Glen, co-owner of Glen Isle Farms Ltd. – a mixed farm and agricultural products supply business in central Ontario – the need for cash-flow flexibility was a main factor in their decision to lease some of their machinery as part of his family’s successions strategy.
Glen says tying significant quantities of capital into machinery would have limited his family’s ability to adapt and act on business opportunities, whereas leasing would not.
Indeed, he says the latter lets them more easily swap equipment to take advantage of new or more practical precision technologies, and scale up and down based on changes in their land base – something very relevant to those farming in the highly-competitive Ontario land rental market.
It’s the flexibility […] It gives you the ability to stretch out the payment
The trouble with leasing is the farmer does not accrue value in the machine. However, Glen says there are other – albeit more indirect – ways to view wealth accrual.
Buying a piece of machinery after a lease ends, for example, can gain the purchaser a lower purchase price. This is because the original price tag, which would have been agreed upon at the start of the lease, can often be noticeably lower than the current price associated with an equivalent piece of machinery – not to mention the precision and data-tech capabilities it might feature.
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Efficiency and freeing-up time for other aspects of his family’s business is another factor.
“We went from being able to plant 60 acres a day to 200 acres a day […] that’s time we can use to work on other things,” says Glen. “Bigger equipment can also give you an opportunity to do some custom work. There’s certainly demand for it.”
According to Jeff McGavin, an Ontario equipment dealer and chair of Canada East Equipment Dealers’ Association, leasing is certainly growing in overall popularity because of the payment flexibility and technological adaptability it affords. He says equipment dealers themselves are also more focused on leasing and low-rate financing, while less focused on more historically common cash discounts.
McGavin adds farmers in general are keeping equipment for significantly shorter periods of time. This applies to those buying and selling, as well as leasing. Those who do lease often bundle payments with extended warranties, then replace the equipment (often with newer and more advance models) once those warranties expire.
“The brutal part is there’s really no accumulation of equity this way,” he says.
Stuart Person, a farmer from Canada’s prairie provinces and national director of primary producers with MNP – a large tax and accounting firm – says a combination of record-high machinery prices and the drive to use ever-greater technologies is a major issue for the financial feasibility of many Canadian farms.
Farmers who want to incorporate more data-capturing technologies, he says, are almost forced into this high-cost machinery game since those data technologies often require the capabilities of new equipment. Regardless of the approach to financing, too, he says this is a substantially larger issue for smaller farms with more a limited cash flow.
In 2013, for example, a new combine could be purchased or leased at a sticker price of around $ 300,000 (Cdn). Now a combine of equivalent size and technological advancement costs between $ 600,000 and $ 700,000 (Cdn). Once that combine is purchased, however, it only depreciates in value.
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Person says that depreciation is often not considered in business planning, nor is the possibility of not being able to make a lease payment. If a lease can’t be paid, that is, there is no asset of value the farmer can fall back on.
“The economics of farming are going to struggle to cope with stuff like that […] I think a lot of farmers are just not paying attention to that right now,” Person says.