Figure out your breakeven point before taking on equipment debt | Crop

With spring planting well underway across the region, agriculture equipment is once again back to work. As the very heart beat of an operation, large ag equipment is a necessity – albeit an expensive one. With the current financial climate cutting into already thin margins, Lars Hanson of First Interstate Bank encourages producers to really crunch numbers before they consider making big purchases right now.

“Do the math. Sit down and figure out what your input expenses are and what your breakeven point is going to look like,” Hanson prompted.

As a financial professional and a producer himself, Hanson is all too aware of how precarious production agriculture is right now. For years, producers have been forced to find the balance between affordability and efficiency when it comes to equipment. From a production standpoint, it is not efficient to farm 6,000 dryland acres with a 20-foot drill, but from an economic standpoint, it can be extremely hard to justify a bigger implement.

According to Hanson, knowing exactly where you stand financially and being able to articulate exactly where your breakeven point is both before and after harvest will help you have a better grasp of your financial health and therefore enable you to make sounder decisions.

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“Farmers and ranchers are always ‘next year people.’ Next year is always going to be better than this year, but you need to focus on how leveraged are you and how dependent are you on a banner year to make the operation work,” he added.

While risk absolutely has its place, at a time where interest rates are rising, input costs are soaring, and COVID has bottlenecked production, making new equipment nearly impossible to track down, current times may not be ideal for risk-taking. Hanson actually cautions producers to hedge their bets against production risk right now.

Standard equipment loans are requesting 20-30 percent down and are averaging five-year terms with long-term investments like pivots and combines having the possibility of being stretched out to seven years. Before committing to debt for that long, Hanson suggests really asking if the debt is worth it. Will you be able to make it if the drought lasts another year? What if a hailstorm sweeps through right before harvest?

Hanson also noted that in a situation such as the one we are in now, try to plan ahead as much as possible. We know manufacturers don’t have much equipment coming off the line and therefore there is a lot of demand on used equipment. Don’t pull your baler out of the shed on June 1 and then discover it is broken beyond repair. Making a knee-jerk financial decision right now could prove to be costly.

“I always say that most of the bad decisions are made because you have to make a decision. I tell people that if they can plan, plan ahead as far as you can,” he said.

Farming is a tight margin business. It always has been, but right now the margins are razor thin with very minute and seeming insignificant business decisions being the difference between make or break. This is a time, Hanson says, where it would be good to watch your pennies. The dollars will take care of themselves from there.

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