Joint Machinery Ownership: A Strategy for Small and Mid-Sized Farms

Limited weather windows and rising machinery costs can leave small and mid-sized farmers wondering what the best strategy is for efficiently replacing machinery. Sometimes, pooling resources through joint machinery ownership can reduce machinery costs for both parties. Let's address some common concerns and considerations for determining machinery ownership between two or more parties.

Sizing Machinery

The first step of any machinery acquisition method is to properly size machinery for the number of acres farmed. Proper sizing is crucial to ensure that all acres are planted, sprayed, or harvested in a timely manner, as well as to prevent equipment from being too large for the parties involved. Just as machinery can physically be too large for a farm or field, it can also financially be too large for a farm or field.

There are a few key factors that determine the correct size of farm machinery:

• Power Unit Capacity – does the tractor have adequate weight, horsepower, traction, and hydraulic capabilities to handle the machine in question?
• Machine Field Capacity – is the machine in question large enough to cover all the acres farmed in a timely manner?
• Operator's Financial Capacity – do both parties involved have the cash flow, financing, or knowledge to handle debt associated with the machine in question?
• Cropping Needs – how many acres must be farmed with the machine in question, and how do individual cropping needs vary between all parties involved?

Other factors that could complicate this decision include individual debt load, mechanical skill, and physical limitations of each party's fields.

Machinery Costs

Joint Ownership Costs

Machinery ownership costs, also referred to as fixed costs, are expenses that remain constant regardless of the level of production output. Fixed costs include interest, depreciation, taxes, insurance, and housing. Regardless of the level of output (bushels or acres), these costs will remain stable. Shopping for competitive financing rates, cash purchase discounts, and manufacturer rebates help reduce initial ownership costs. Producers who maximize machinery usage can dilute the fixed costs of owning machinery, thus reducing their ownership costs. Typically, ownership costs are highest in the first few years of the ownership period due to interest and depreciation of newer assets. However, ownership costs generally decrease as machinery ages.

Joint Operating Costs

Machinery operating costs, also called variable costs, will change as machinery usage changes. Expenses such as fuel, lubrication, labor, and repairs will increase as machinery usage increases. Preventative maintenance, skilled machinery operation, and basic mechanical knowledge can all help to reduce the amount of operating costs a machine accumulates over its lifetime. Typically, operating costs are lowest in the first few years of the ownership period due to new parts and (possibly) warranty coverage on defective parts. However, operating costs generally increase as machinery ages.

Complications with Joint Ownership

Joint ownership can be challenging if ownership and operating costs are not clearly recorded or understood. If one of the parties incorrectly estimates their cropping needs, or fails to accurately record repair costs, or both parties incorrectly size the machine for their operation, the costs of those mistakes will haunt all of the parties involved. Consider all methods of investment – suppose one owner wants to purchase the machine outright with cash, and the other prefers to finance at a low interest rate for several years. The first owner might have debt recorded on their balance sheet that they don't want to show, and the second owner might be forced to lay out cash that they don't want to spend. Also, what happens if everyone needs to use that machine at the same time? Who gets to decide when the machine will be replaced, and how much should be invested in the replacement?

When deciding to jointly own machinery, be careful you don't accidentally become responsible for the other party's current debt load, negligence as an operator, or changing cropping needs. Fair joint ownership agreements should consider how repairs are split, who is responsible for the initial investment, and how the agreement can be fairly terminated if one or more parties fail to uphold their end of the agreement. Having legal advice and a written contract can save many financial and emotional hardships if joint ownership arrangements should fail.

Fortunately, you won't be the first person to work through a joint ownership plan. Several university Extension programs in the Midwest have developed example contracts and ownership plans that highlight considerations and scenarios you can review to figure out exactly what should be important to your farm's needs.

Alternatives to Joint Ownership

Custom Hire
Custom hire is a financially feasible option for farms that require highly advanced operations within a very short timeframe. Custom hire has become more popular for operations like:

• Chopping corn silage or other forage crops
• Increasing corn grain or soybean combining capacity
• Variable rate application of lime or fertilizer
• Planting row crops with precision agriculture technologies
• Spraying restricted-use pesticides or fungicides on tasseling corn

By custom hiring operations, producers eliminate the need for out-of-pocket machinery repairs, ownership costs, or continued investment in updated precision technologies. In this scenario, the high fixed costs of continual machinery replacement are diluted by the large number of acres that the custom operator covers each season.

Rental or Lease
Machinery rental or lease may be the best option for farms with limited usage of specific machinery. For example, a cow-calf producer who winters livestock for 2-3 months out of the year, generates less than 200 tons of bed pack manure, and only spreads manure for one week out of the year might benefit from renting a manure spreader from a neighbor or nearby machinery dealership. In this case, the producer a) does not absorb ownership costs for the entire year, b) frees up cash or their line of credit for other capital purchases, and c) eliminates the repair costs associated with using that spreader. In other cases, local conservation districts sometimes offer no-till corn planters or grain drills for rent to plant corn, soybean, small grain, or forage crops.

None of these machinery acquisition strategies is perfect for every farm. Choices will vary based on the operator’s financial capacity, labor capacity, and comfort with risk. Some farms even employ several methods of machinery acquisition: a small dairy farm might own its own pull-type chopper for hay, custom-hire a self-propelled harvester for corn silage, while leasing a pull-type sprayer and renting a no-till planter. In another scenario, a grain crop producer might have a combine that is perfectly sized to harvest their corn and wheat acreage in a reasonable timeframe, but excellent yields or poor weather in one season demand hiring an extra combine to help harvest the crop before quality suffers.

Assumptions include a 10' John Deere 1590 no-till grain drill. Purchased new for $65,000, retained for 20 years after purchase. Power unit is a 125 HP tractor, purchased used for $45,000, retained for 20 years after purchase.

Some important considerations for each acquisition strategy, in addition to cost:

• Sole or joint outright purchase gives the owner the most flexibility and control over timeliness and usage of the drill but costs the most of any option
• Custom hire removes the need for labor and a power unit, as most custom operators will supply a tractor and operator, but timing and availability are limited to their schedule and location
• Rental rates are significantly lower than outright ownership and allows the producer to complete the job to their preference, but machine availability may be limited

Financially savvy producers must begin by estimating their machinery costs to determine which method of machinery acquisition is most economical for their operation. A good resource to consult is the Iowa State Ag Decision Maker tool, which uses a series of Excel-based workbooks to estimate total machinery costs using labor rates, machinery replacement costs, fuel prices, and several other factors to estimate per-acre costs of owning and operating equipment.

Producers should strive to update their machinery cost estimates every few years as repair costs accumulate, and should use the tool when considering machinery replacement to decide which strategy is best for their farm.