Between COVID-induced supply chain disruptions, labor disputes, parts shortages and high demand, replacing or upgrading equipment over the past few years has been a hard task. Many farmers have struggled to find the equipment they need, and those who did paid significantly more for it.
From 2019 to 2021, the average list price of a combine with a separator and corn head increased 7% to just shy of $690,000, according to economists at the University of Illinois. A new 590-hp tractor costs 12.6% more, while the average cost of the planter is almost 17% higher.
Price increases aren't new to farmers, says Chad Gent, Farm Credit Services of America senior vice president of retail credit. They've been watching prices climb for more than 15 years, just not at the pace of the last several years.
Higher price tags make the decision about how to finance that purchase more critical to the business's success. As equipment costs and interest rates rise, farmers may need to spend more cash up front instead of borrowing at the same rates they have in the past.
"They can't just go borrow 70 to 80% of that machinery equipment value, because that debt on a per-acre basis may end up being too high because the equipment is so expensive now," he says.
As Gent suggests in the Progressive Farmer January 2023 issue's cover story (see "Gauge Your Bottom Line," on page 16, Progressive Farmer, January 2023), he often advises farmers to look at their working capital and debt service on a per-acre or per-head basis. It converts a large financial figure into a number that's relatable to the everyday workings of the business.
Strong incomes over the past several years have helped build up farmers' balance sheets, but tighter margins are ahead. "It's just like land. You need to keep that debt service on equipment at a reasonable level, because there won't be the profit margin to support it," he says. "It's really a balancing act."
The challenge will be balancing the need to upgrade equipment and the opportunities for growth while maintaining liquidity. "It's important to figure out a level of working capital and debt service to keep them viable long term," he says.
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