Strategic Considerations When Buying Farm Equipment

By Dr. Brady Brewer, Assistant Professor Department of Agricultural Economics, Kansas State University

As a farmer, investing in farm equipment is as significant of a decision you have to make as it impacts productivity, operational efficiency and overall profitability. According to the USDA Agricultural Resource Management Survey (ARMS), farm equipment makes up around 10% of the total U.S. farm balance sheet for commercial farms. This highlights how important it is to understand how a piece of equipment will impact your farm’s financials and operations when considering new or replacement equipment. 

Minimize the Cost of Production 
The goal for every piece of equipment purchased is to minimize the total cost of production. In other words, for every unit of production e.g., pound, bushel, etc. that the farm produces, the goal is to minimize the total cost to produce it. This includes the cost of equipment. You need to understand the tasks this equipment will need to do, minimum horsepower requirements, the cost of ownership and maintenance costs, features needed and the size of equipment needed to understand how this purchase will impact your farm’s cost to produce. 

You should create a detailed budget that includes not just the purchase price but also additional costs such as taxes, insurance and delivery charges to understand better the direct ownership costs of the equipment you are considering. 

Five Managerial Levers 
To complicate matters, you also need to remember the bigger picture, as this could save you or cost you money in other areas of the farm. To examine these considerations, I want to introduce the “Five Managerial Levers” a farmer uses to manage their farm. Broadly speaking, any managerial decision a farmer makes falls into one of these five categories: managing output price, managing yield, managing cost of production, managing assets and managing people. These five managerial levers also represent the key strategic needs of the farm. 

I urge you to ask, “How does this piece of equipment impact each of these five managerial areas?” before deciding on a piece of equipment. The right or wrong piece of equipment can have broad implications for how you manage your farm and can have large impacts on your farm’s overall profitability. 

For instance, a new piece of equipment could impact the labor required on your farm, either decreasing or increasing what is needed. It could also change the type of labor if specific skills or knowledge are required to realize the productivity gain promised from the new equipment. Given today’s tight labor market, the impact this could have may be a limiting factor in what equipment is purchased.

Impacts on Profitability 
If I haven’t convinced you by now to consider these five managerial areas when looking for your next piece of equipment, let me provide one more example of how these indirect considerations can greatly impact your farm’s profitability. Let’s consider how a new piece of equipment may affect other operational expenses of the farm. With today’s rapidly changing technology, equipment can impact fuel costs per acre, seed costs, time in the field and other equipment costs if complementary equipment is needed. Understanding how your farm’s equipment will also impact the needs of other farm inputs must be considered to fully understand the influence the piece of equipment will have on overall farm profitability. These additional impacts may be hard to quantify when formulating a budget. However, at least knowing whether each factor increases or decreases your total cost of production should still be answered. This will help provide clarity on what equipment is right for your farm. 

Dr. Brady Brewer is an assistant professor in the Department of Agricultural Economics at Kansas State University. His research focuses on agricultural finance, farm profitability, production efficiencies and agribusiness strategy.