Making the best decisions about
farm machinery
■■ By David Heinjus, Rural Directions Pty Ltd
M
achinery decision making can be a complex area
requiring investment of significant capital. There is
nearly always a combination of emotional and business
decision making being undertaken by the farmer. There are also
often large lead times between the ordering of stock and its
eventual delivery on farm. While the farmer is juggling financing
a large investment to address a business need, the machinery
dealership is also juggling trades, delivery risk and seasonal
variability influences on trade demand.
There is often tension between the farmer requiring
assurances their new investment will arrive on time and the
dealership balancing these demands from several customers.
And they are sometimes customers who have become stressed
because a seasonal or market outlook has become quite different
to when the machine order was first placed.
I write this article with the experience of having been exposed
to many aspects of farm machinery decision making. As Managing
Director of the Pareta Farms Group, we have invested significant
capital into farm machinery. Because of this significant investment,
we manage our machinery business as a separate entity.
Machinery is a profit centre
This means we look at machinery as a profit centre, not just
capital that is integrated with the rest of the farm assets.
Many farmers separate their land business from their
operations business. This then facilitates management that
focuses on the land business as a profit centre and the operations
business as a profit centre.
My belief is machinery investment on many farms is so
significant that this principle also needs to be adopted.
As Managing Director of Rural Directions, I also advise farmers
on strategic machinery replacement plans. This also involves the
development of customised changeover policy. Given the large
capital investment required, I have seen plenty of examples where
over-capitalisation in farm machinery has lead to significant
financial stress.
At a glance…
■■ It is critical to understand the policy that underpins the
business decision making process.
■■ A farm machinery business should be run like a
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manufacturing business. The owner should be continuously
asking “what is the cheapest and most cost effective way to
undertake this operation?”
When the cost of owning a machine is cheaper $/ha than
the existing machine it should be changed over.
As a rule of thumb, maintaining machinery investment to
income at 1:1 is a sustainable business objective.
Calculate field efficiency to look at ways to improve
efficiency and leverage off the total investment in
machinery.
Advisors should question underpinning assumptions that
underpin a machinery business case.
November–December 2012
As an on overarching management principle, I like to see
businesses operating with a machinery investment to income
ratio of 1:1. If a client wants ‘the toys’, I suggest they need to do
some more deals to leverage their overall business revenue.
I also advise several large-scale machinery dealerships in
business management and marketing. From this perspective I
have seen plenty of examples of emotional, non-strategic and
tax motivated purchases that really leave you wondering about
the depth of thinking that has gone into the decision making
process.
Machinery decision making starts with wellconsidered policy
I was running a workshop with a group of farmers recently
and we were discussing differences that exist in policy between
farms.
Farm business policy is often intuitive – that is, it is often
not written down. This does not mean it has not been well
considered, the policy has been thought about reflectively for
years.
At the workshop, we were talking about machinery decision
making as an approach to demonstrating the differences in
policy. Within the group were three farmers all sitting in a
row. The first farmer was adamant that they change over their
harvester every 1200 hours. The next farmer said – we always
look for good second hand harvesters and would look for a 1200
hour machine and run it out to 2500 hours. The third farmer
then said, we only buy second machines and run them until they
drop.
Each of the three businesses are successful and have their own
set of reasons why they have such different policies. These often
relate to risk, capacity to undertake repairs and maintenance and
initial level of investment.
Farm vehicles are another example where both tangible and
non-tangible criteria are applied to decision making policy. I have
several clients who have very high standards regarding the image
of their business. They look at investment in vehicles as a direct
reflection on the brand image of their business.
They believe that if employees are driving around in beaten up
old vehicles, then this portrays this ‘broken down brand’. These
clients want to portray a professional and modern farm business
image. They believe this is important for attracting and retaining
employees. Given this ‘brand’ objective, these clients will change
over farm vehicles every 140,000 km. Strangely enough this is
often more regular than the family car.
Starting the machinery decision making process with a
discussion about policy is a good place to begin. Policy should
consider:
■■ Functionality;
■■ Strategic business need;
■■ Brand image;
■■ Proactive management of risk;
■■ Occupational Health and Safety;
■■ Personal productivity;
■■ Capacity to manage breakdowns;
Australian Grain — 29
Efficiency objectives;
Upgrade frequency;
Ease of employee use and understanding;
Colour;
Budget; and,
Personal goals.
Like all business policy discussions, it is important to have
these with all business owners and stakeholders. This then leads
to greater depth of thinking and commitment to the overall
business strategy.
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Case study – The new truck
Understanding the total cost of ownership
Recently a client sent me an email titled the ‘new truck
equation’. The purpose of the email was to sound me out
regarding a business case for a new prime mover and two trailers.
Before we judge the proposal, I will provide some context.
The client has picked up some signals from his existing
contractor that started to worry him. His carrier has indicated he
is planning to sell his trucks and retire in a couple of years. It has
been a very productive relationship that has existed for the last 20
years. The current spend on freight is approximately $78,000 to
carry 4800 tonnes ($16.25 per tonne).
The carrier is also very responsible and is very aware of the
consequences of incorrect classifications. The contractor often
requests reclassification of grain at the silo and has been happy
to blend loads to achieve maximum quality. This has resulted in
many loads achieving maximum value. Obviously this informal
quality control system is highly valued by the client. The client
now has many questions going around in their head. These
include:
■■ How will I ever find another contract carrier who has the same
level of care and I can trust?
■■ How can I control the misclassification risk?
■■ How can I still blend loads to manage quality risk?
■■ How will I keep the grain away from my harvesters?
■■ How can I control the whole logistics process at harvest? and,
■■ How can I manage the breakdown and compliance risk if I buy
a second hand truck?
The business rationale emerging in the client’s
mind is:
■■ A desire to control the whole logistics process;
30 — Australian Grain
■■ A desire to have flexibility to blend grain on farm;
■■ The worry about the risk associated with buying a second
hand truck;
■■ Simplistically, if they are currently spending $78,000 per
annum, then the truck will roughly pay for in a bit over five
years;
■■ Some tax savings; and,
■■ An underlying desire to buy a new rig.
The new rig has everything – 90 tonne GCM, auto shift
transmission, PTO hydraulics, auto slack adjusters on the brakes,
480Hp Cummins ISX 15L engine and is quoted at $225,000 plus
GST. The trailers are the same. Gleaming new aluminium tippers
and have been quoted at $218,000 plus GST. Proposed total
spend is $443,000 plus GST.
Too often, farmers buy something because they can, not
because they should. The other excuse is they have been advised
to keep their tax down by ‘keeping their machinery new’.
We talked over the plan and agreed we should commence
a business case process so a proposal can be put forward to
fellow family members. We agreed the first step is a total cost of
ownership analysis including depreciation, interest, on road costs,
fuel, labour, and so on.
Cost of ownership analysis
Annual depreciation can be difficult to calculate. This is
because it relies on trying to value a piece of machinery in the
future. Over the last few years we have witnessed variations in
machinery values because of:
■■ The accelerated depreciation allowance creating demand for
new machinery and flooding the trade market. There were
many new machinery prices that were inflated because the
farmers’ only objective was to claim the tax deduction.
■■ Seasonal conditions either creating demand or no demand for
machinery. Supply and demand curves then influence price.
The wet harvest in 2010 created unprecedented demand for
second hand harvesters and semi trailers. Farmers were paying
higher prices to secure harvesters. Once the risk was managed
the harvester would have depreciated significantly as the trade
market returned to a normal level.
These market influences impact on the overall initial retail
cost. If the farmer pays too much because of reactionary or
non-strategic management, then the level of depreciation will
generally be higher.
Generally, depreciation accounts for wear and tear and
November–December 2012