Aside from land and facilities, machinery and equipment are typically the largest investments dairy farmers make. And given wear and tear of use, deciding when to repair or replace equipment is an on-going question.
“Just because a piece of equipment needs to be repaired, doesn’t mean we automatically send it in to be fixed,” says Eric Madsen, a financial officer with Compeer Financial. “It’s important to look back at each individual equipment item on our balance sheet and really ask whether the repair costs have gotten to the point where replacement is justified.”
Not long ago, when milk prices and margins were better, trading used equipment for new was standard operating procedure. The trade-ups helped farmers keep their equipment inventory current, reduced breakdowns and allowed them to offset income with tax breaks. “Times —and margins — have changed, however, and that means a lot of operations are finding themselves cash-strapped, making new purchases out of the question,” Madsen says.
“A strategy some of our clients are considering is trying to match payments with depreciation,” he says. “Some producers have gotten themselves into a sticky financial situation due to using the 179 deduction on the entire purchase and then setting up a payment. Future payments then have to be made with net income, and the only deduction to the payment is the interest. In tight financial times with little net income, that means burning working capital to make the machinery payment.”
Madsen recommends working with your financial and tax advisors when trying to decide whether to repair or replace major pieces of equipment. “Even when your advisors do not completely agree, they typically work to find common ground that benefit each unique producer,” he says.
Below, Madsen offers some pros and cons for repairing equipment versus replacement:
- No new loan payments for cash flow
- May only need to spend $5,000 on a repair compared to $60,000 trade price
- Tax deductible
- If you can do the work yourself, will likely be very advantageous
- May have to be constantly fixing
- May be less reliable – loss of time with in season repairs
- Overall value will decrease the older/more hours the equipment is used
- At some point equipment doesn’t depreciate any longer
- Cost of the repair could be as much as the value of the piece of machinery
- Warranties on new equipment
- May get one- or two-year parts warranties with a used equipment purchase
- Upgraded technology
- Tax depreciation
- If the equipment market is depressed, could get a “deal” on a newer, used piece of equipment
- Will likely still have some maintenance/repair costs
- May need to update other equipment to match up to the new equipment. For example, combine heads, planting technology, etc.
- Could burn working capital faster