Rent Combines by the Hour?

Rent combines by the hour?
By James D. Ritchie

Lease company, MachineryLink, grows as producers scrutinize large-ticket purchases.

Aside from the land itself, high-price rolling stock probably represents the biggest capital investment most crop growers make.

But there’s a big difference. Land (hopefully) gains in value as time goes on—or at least holds dollars together. On the other hand, a machine begins to lose value the minute you take title to it.

Operating profits come from using equipment, not necessarily from owning it. You don’t so much need a new combine as you need bushels of grain harvested in a safe and timely fashion. If a rule in farm finance is to own what appreciates in value and rent or lease what depreciates, a high-priced piece of farm machinery definitely falls into the latter category.

Still, it’s difficult for farmers to practice that rule in all cases.

Agriculture is one of the few industries that invests in depreciating assets. Farmers are faced with this more and more, as equipment becomes more expensive.”

MachineryLink, Inc., was formed 6 years ago to give crop growers an alternative to owning costly but under-utilized equipment—in this case, combines.

With MachineryLink’s program, rather than invest $250,000 in a combine that will be used only 7 or 8 weeks each year, a grower can obtain the use of a late-model machine and only pay rent on the actual separator hours operated. It appears to have been an idea whose time had come.

The specialty finance and asset management company started with a few combines in three states. Business volume has grown by an average 115 percent each year since then. MachineryLink has 250 Case-IH and John Deere combines that it rents to producers in 33 states and several Canadian provinces.

As combines continue to be more expensive and farmers continue to add acreage, the company sees more need for the services it provides.

At the end of the season and between users, the combines are serviced, any needed repairs are made, and the machines are located at staging yards in Kansas, South Dakota and temporary yards during harvest.

A grower just needs to let MachineryLink know what kind of machine he needs, when and where he will need it and what crop [or crops] he will be harvesting. MachineryLink delivers the combine set to the grower’s specifications and ready to go. Rates are based on a fixed fee to cover transportation, plus a negotiated hourly rate for the actual use of the machine.

Acres and hours make the transaction work for the company. In a way, MachineryLink takes a page from the custom cutter playbook. Rented combines typically go to work in spring, cutting winter wheat in southern plains states, and follow ripening small grains north into Canada and the Pacific Northwest. At the end of summer, they swing through fall-maturing crops in the Midwest.

“The combine we rented last fall came here from the Pendleton, Ore., area,” said Clayton Arnold, who grows corn and soybeans in Vernon County, near Walker, Mo.

About 2 years ago, Arnold added more land to his crop acreage.

“We already had a Case-IH 2388 combine,” he said. “When we added more land, we needed another machine to handle the extra soybean acreage. I went through the numbers on buying another combine and couldn’t justify the purchase, so we rented a second combine—a later model 2388—from MachineryLink.

“The rented combine got here when I needed it, set up and ready to roll,” Arnold added. “This way, I don’t have to invest capital and the total rent payment is deductible in the current year. When I finished harvest, MachineryLink came and picked up the machine. I didn’t have to store it, maintain it or insure it.”

Not counting fuel, Arnold figures his per-acre harvesting cost with the rented machine was just under $10 per acre. That’s less than 65 percent of what his costs would have been had he purchased a new combine.

“One thing I especially like: There’s an 800 telephone number right in the cab of the combine,” Arnold said.

“We had a little trouble with lowering the header and I called MachineryLink. They got an answer right away. The problem turned out to be a pretty simple one. A sensor needed to be re-set and we handled it over the phone. In my experience, MachineryLink has excellent service backup,” he said.

The company has service agreements with a network of more than 300 machinery dealers. At the end of each rental period, complete service and any needed repairs are performed on the machine.

In the next several years, demand for asset management services such as MachineryLink’s will probably grow. According to the Freedonia Group, an industry market research firm, demand for agricultural equipment will grow at nearly 5 percent per year through 2010, to a record $89 billion worldwide. And there’s nothing to indicate that machinery will become any less costly to buy, operate and maintain between now and then.

In 2006, MachineryLink’s principal investors added $17.4 million more equity to support future growth.

To learn more about MachineryLink’s lease-and-rental programs and how to contact representatives in your area, log onto www.machinerylink.com/contact and go to the outline map of the United States and Canada. Click on your state to find the name of the MachineryLink representative in your region. Or, call toll free (888) 272-3323.

Push the pencil on buying vs. leasing
As machinery has become more costly, equipment leasing has gained favor with many crop growers. And leasing can have advantages, but you need to understand how a lease works and how to accurately compare the costs of leasing and buying.

“There are advantages and disadvantages to both buying and leasing,” said Ray Massey, University of Missouri ag economist. “But there’s no one-size-fits-all answer to the question: Should I buy or lease?

“There are cases where buying fits better and buying often gets you a lower rate of interest than leasing,” Massey added. “What are your goals and priorities? If you don’t have enough cash to make a sizeable down payment, you may want to lease equipment. How does your balance sheet look? A lease contract may not show up the same way as a purchase and may not be counted the same way against your conventional debt.”

When you buy equipment, you (and maybe your lender) pay the entire purchase price. When you lease machinery, you pay for the use of equipment for a specified period of time. At the end of the lease period, the equipment still has value to its owner (the lessor), who can sell it or re-lease it. This residual value usually is stated as a percentage of the original price.

Some time ago, Ray Massey and his colleague at Iowa State University, William Edwards, wrote a “lease analyzer” that can help producers decide whether a lease or purchase is more profitable. The spreadsheet program requires a computer with Microsoft Excel, and is available for downloading from the Midwest Plans Service website (www.mwpshq.org). Use the site’s search function to find NCR-615.

“Most major equipment companies manage their own lease programs,” said Massey. “These can be good, especially if the company is trying to move machinery. The Farm Credit Service also is more aggressive in financing lease contracts.”

Where you farm, what kind of crops you grow, and what kind of equipment you need will, in part, determine the financial realities with your own buy-versus-lease decisions.

“We can help growers make a realistic comparison of buying and leasing,” said Kevin Saunders, MachineryLink, Inc. “We use the producer’s information on how long he plans to hold the asset, what his rate of interest is, how many hours he plans to use the equipment each year. We have developed a very realistic calculator, but it depends on the quality of information the grower provides.”

How well your cash flows, the size of your debt load, the impact of buy-vs-lease on your taxes—all of these and other factors can influence your decision. It’s a good idea to go over these points with your accountant.

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