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Post by torriem on Mar 30, 2021 20:13:13 GMT -6
The talk about leasing and machinery costs caused me to remember some articles I read in Grain News a few months ago: www.grainews.ca/features/depreciation-and-farm-machinery-a-rule-of-thumb/www.grainews.ca/features/do-you-really-need-all-that-machinery-on-your-farm/Now I'm not the smartest guy, but frankly I found this guy's ideas a bit strange: Really? A lot of rarely-used equipment on my farm is long since depreciated to zero and I just don't care. It's worth more to me than it would be to move it for any reason. He does have a point if your goal is to trade off, replace, and rejuvenate your capital equipment. I have several neighbors that farmed until their machines were worn out and then couldn't afford to replace the equipment, so had to sell out and retire. The calculus is changing now, but over the years several times we've done the analysis on trades and it seemed like the yearly payments were similar whether you traded off every few years, or went a lot longer, parked the old machine, and bought a newer unit outright. And I think in light of the other conversation, things are leaning towards the latter quite a bit these days (auctions, private sales, etc). Anyway I found the articles interesting if perplexing. Most of you all are a lot more savvy than me at this sort of thing. Any thoughts?
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nvw
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Post by nvw on Mar 30, 2021 20:18:05 GMT -6
Antiques tend to appreciate with age, don't they? My Estate will be worth a Fortune, the "Kids" will be "Rich" I Hope the Fockers Appreciate it.
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Post by Albertabuck on Mar 30, 2021 21:14:12 GMT -6
I've read that before somewhere about that guy spouting off about old stuff costing money to sit there, like Torriem said, was depreciated out years ago and as NVW said, worth more every day.
Other that some stuff I bought for parts or just to have, most of my older hardly used stuff is worth more today that when I bought it.
I liken advice like that as typical that we get all too often from ag groups and more, its from people who went broke and or couldn't do it on their own, but now those of us that do know how to do it, are supposed to pay them to "tell" us how to do it proper to qualify for things like the sustainable beef designation and such. Perfect example is that loser Steve Kenyon with Gateway Research Group out of Westlock, and is also a common contributor to the Cattlemen magazine. F'ck me, even the SPCA has a file on him and he's supposedly some pasture and cattle "guru"...yea right. Ask any of his neighbors around Busby
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nvw
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Post by nvw on Mar 30, 2021 21:35:23 GMT -6
I've read that before somewhere about that guy spouting off about old stuff costing money to sit there, like Torriem said, was depreciated out years ago and as NVW said, worth more every day. Other that some stuff I bought for parts or just to have, most of my older hardly used stuff is worth more today that when I bought it. I liken advice like that as typical that we get all too often from ag groups and more, its from people who went broke and or couldn't do it on their own, but now those of us that do know how to do it, are supposed to pay them to "tell" us how to do it proper to qualify for things like the sustainable beef designation and such. Perfect example is that loser Steve Kenyon with Gateway Research Group out of Westlock, and is also a common contributor to the Cattlemen magazine. F'ck me, even the SPCA has a file on him and he's supposedly some pasture and cattle "guru"...yea right. Ask any of his neighbors around Busby Like the AADC loans Officers from the late 70's early 80's. The ones we had all went broke then became a Loans Officer.
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Post by SWMan on Mar 30, 2021 23:38:10 GMT -6
I can't really find fault with those articles, much of that is good advice.
Why wouldn't you sell equipment that you weren't using? Even if it's already depreciated you still have opportunity cost on the dollars invested in idle equipment, and eventually it will be worth the price of scrap unless it's Honda three wheelers or JD 4440's. Admittedly I know this because I haven't always sold stuff and it sat around too long, so I'm as guilty as anyone.
My rule of thumb has been to "Never borrow money to buy a depreciable asset". Some may remember I had that as my signature on the old forum for awhile, but it triggered a lot of guys so I got rid of it. I do feel it makes sense though.
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Post by Oatking on Mar 31, 2021 7:18:42 GMT -6
I agree with ALBERTABUCK and SWMAN. About 11 years ago I bought a house in Winnipeg to live in over the winter to make life easier for my wife and kids. The same time I bought a john deere 9760 combine. At the time both cost 225 000. Today the house is worth over 400 000 and my spare 9760 is worth 50-60 000. SWman is right about borrowing depreciating assets. Although I am guilty of borrowing for these items they do serve as a tax right off and that is better than giving more money to trudeau for silly socks!
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Post by hardrockacres on Mar 31, 2021 8:03:12 GMT -6
SWMan - my grandpa always said and followed a similar rule...he always told me 'if you need a loan to buy it you don't need it". He said he never had a loan in his life and paid cash for everything. Including back around 1979-80 they bought their winter/retirement home in Saskatoon in one of the newer high end neighborhoods back then. Bought a new house for 120k, (I would think alot of money at the time). He left my Uncle a farm with all the equipment paid for, nothing older than 5 years, all land fully paid for also, and a seed cleaning plant with an established client list and seed business. In 15 years after he past on my uncle has bankrupted the farm, had to sell of over 1/2 the land and downsize equipment to pay off creditors. All because he decided to have newer and bigger equipment to keep up with the neighbors. Really bothered my mom to watch land that was in the family for over 100 years get sold off due to some really bad mismanagement.
That all said, I do think his rule would be much harder to follow now vs then. It would put a big dent in a bank account to buy a new combine at 750k today with just cash. (at least it would for me Lol)
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ltk
Junior Member
Posts: 80 Likes: 98
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Post by ltk on Mar 31, 2021 8:51:21 GMT -6
My thoughts, and these are only my thoughts, I'm not suggesting anyone else subscribe to my way of thinking, are this. My sprayer, that i bought new in 2012 has 4500 hrs (540,000 acres) on it. I have no pans to change it. As long as it is doing the job and not causing me downtime I see no reason to change it. If I were to trade for a new sprayer for example, I would have to pay at LEAST $300,000 difference for a machine that will do EXACTLY the same job as the one I have now. My current sprayer is pretty much depreciated out so every time i turn the key, it makes ME money. If I can go spray for $5/acre with a machine that is basically worth nothing or a machine that is worth $500,000, why in the WORLD would I choose the $500,000 one??. My gross income would be the same but my costs would be a LOT higher. If/when the time comes that my current machine becomes a problem child and is no longer reliable, I will STILL not buy a new one. Only doing 60,000 acres per year I can no way justify the price. Rather, I will buy a lower houred 4830, rig it up the same as the one I have, save about $300,000 and have TWO sprayers in case one breaks down. The key is that, once that piece of equipment is paid for, you keep making those payments (or close to it) into an account for replacement so when the time comes you CAN replace it and you won't be paying interest. On the subject of paying taxes. Paying taxes is like getting old, it sucks but the alternative is worse. It;s a REALLY simple concept. If you are not paying tax you are not making money. I am in this to make money so I fully expect to pay taxes. When I don't (like this past years) I and NOT happy. Of course you use every deduction available to you to reduce your taxable position but, IMO, to buy something just to put yourself in an untenable position is lie saying "Holy crap, I made money this year. I better piss a bunch of it way so i don't have to pay a little bit in tax". To continue with the comparison that Oatking man[de regarding the house and combine, A very good friend of mine bout a new sprayer in 2009 for $225,000 to replace his spray coup. A few months later he said that he should never have bought the sprayer but should have bough land instead. A 1/4 of land was about the same price. He said that had he bought the land, the money that the land produced would pay for a chunk of the cost to have his farm custom sprayed, the value of the land would go up while the value of the sprayer would go down and he would have to do the spraying. When they had an auction sale in 2016 IIRC (the 2 brothers were splitting up), they got $175,000 for the sprayer and land was going for $400,000. BTW, After the sale he said he calculated his cost of spraying with his own machine and said it came to $5.48 per acre. That was counting the depreciation on the sprayer, operating costs and his time. There was virtually no repairs required for the time he had it.
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Post by SWMan on Mar 31, 2021 9:49:34 GMT -6
That all said, I do think his rule would be much harder to follow now vs then. It would put a big dent in a bank account to buy a new combine at 750k today with just cash. (at least it would for me Lol) It's actually not hard to follow this rule(unless you have unforseen crop failures). It simply requires living within your means, especially at the start of one's farming career. There is tons of reasonable priced older equipment available that can do a fine job of growing a crop if the goal is to grow a good crop and not to look good doing it in front of the neighbors. Once your dirt is paid for it is surprising how much more affordable some newer equipment becomes, especially if you have learned how to say "NO" to the salesman already. This reminds me of another personal trick, learn how to say NO...it can be very rewarding! I think if everyone followed the rule about borrowing money to buy depreciable assets that equipment would be a lot more affordable, because less people would be buying stuff.
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Post by snapper22 on Mar 31, 2021 10:11:50 GMT -6
Think the elephant in the room is the tool box and peoples lack of desire to open it. I’m by certain means not mechanically inclined but I put in my best effort. I have neighbours both good fixers and ones who don’t. It’s not a case of ability neither just learned helplessness and that looking over the fence at others. I wish I had a little more training in mechanics when I was younger. Went to university when I should have done a trade but that’s under the bridge. I tell my son to do that before he decides whether he farms.
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Post by jcalder on Mar 31, 2021 12:14:07 GMT -6
Being a mechanic is a moot point. If you're not making payments on the machine then the rare time it breaks down you can hire someone to fix it.
I just laugh at all the people out there that think a tractor with 3000 or 4000 hours is "wore out". Saw it on twitter not long ago, someone said they wouldn't run their seeding tractor to more than 4000 hours because it becomes a liability at that point.
Shit, all our tractors have over 5000 hours except for the 9570RT we just bought, which has 3700... I'm surprised we ever get our crop in...
Same goes for our 9760's. They are worth maybe 60k each. So 120 together. Couldn't even buy a header for a newer combine with that. $5000 to $10,000 a year on the combines in pro-checks at GVE. Rarely have any downtime.
Still take off all the wheat in 3 or 4 days. Same for beans and canola. Corn is a different story but that's limited to a pile of other factors beyond combine capacity.
As for borrowing to buy depreciable assets, I see no issue with it as long as you don't borrow beyond what you can earn to repay. I could probably scrounge up the borrowing power to buy an X9 1100 but that'd be pretty stupid. However if some circumstance arose where we needed an S680 or S790 instead of two 9760's we could likely make that swap and not go broke in the process.
I don't farm to get rich. I farm because I usually enjoy it. If that means I have to borrow a little bit to get a nicer machine, you don't have to agree with me.
Lots of farms out there that get all new stuff every year. I highly doubt they are paying cash for that iron. I don't do their books so I'm not gonna comment on whether it's stupid or not.
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nvw
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Post by nvw on Mar 31, 2021 12:40:26 GMT -6
My low hr. tractor is just shy of 10,000 hrs. My high hr. one is over 15,000. They are still pretty reliable.
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Post by torriem on Mar 31, 2021 18:25:56 GMT -6
My thoughts, and these are only my thoughts, I'm not suggesting anyone else subscribe to my way of thinking, are this. My sprayer, that i bought new in 2012 has 4500 hrs (540,000 acres) on it. I have no pans to change it. As long as it is doing the job and not causing me downtime I see no reason to change it. If I were to trade for a new sprayer for example, I would have to pay at LEAST $300,000 difference for a machine that will do EXACTLY the same job as the one I have now. My current sprayer is pretty much depreciated out so every time i turn the key, it makes ME money. If I can go spray for $5/acre with a machine that is basically worth nothing or a machine that is worth $500,000, why in the WORLD would I choose the $500,000 one??. My gross income would be the same but my costs would be a LOT higher. If/when the time comes that my current machine becomes a problem child and is no longer reliable, I will STILL not buy a new one. Only doing 60,000 acres per year I can no way justify the price. Rather, I will buy a lower houred 4830, rig it up the same as the one I have, save about $300,000 and have TWO sprayers in case one breaks down. I agree and think in a similar way. Yet this is the very thing that the articles are telling us we should not be doing. Now that your machine has depreciated to zero he figures you've lost a significant portion of the cost of the sprayer. In his mind you've lost money. He would have recommended trading off the machine after just a few years to maximize the trade value. I think he even believes you'll spend less money overall by doing so. An interesting perspective to be sure. I guess it all depends on what your end game is, and what your goals and aspirations are. The author seems to be coming at it from a rather narrow point of view and is measuring everything in only dollars, and a certain kind of dollars at that. Regarding debt, avoiding it to buy depreciating assets is a noble goal. But I don't think it's completely realistic. Even buying used stuff at auction more often than not involves taking out a short-term loan. I certainly don't want the level of debt of my large neighbors. But I acknowledge some machinery debt may be required. Oddly, the author of these articles seems to recommend carrying loans and trading often (to prevent depreciation costs), vs buying cash for used equipment.
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Post by kenmb on Mar 31, 2021 19:38:09 GMT -6
I don't really know if depreciation matters. What I mean is it seems to be something that only matters for taxation. Does it really effect how your business operates, and if it does - should you be managing your operation with depreciation factored in. For example, if your farm is going bankrupt will depreciation ever be a factor and therefore something you managed wrong. I am thinking you had other issues. It seems to me depreciation affects taxation and net worth -neither of which really matters.
As noted, you need to be turning a profit to pay taxes, so adding a depreciatable asset to lower taxes is likely a bad idea. And may be one of the things actually leading to bankruptcy if things go poorly. If not for tax purposes then what role does depreciation play.
As for net worth, should you really be running your operation to maximize networth and thus pay close attention to depreciation or are there other factors more important towards making management decisions then what impacts net worth more. Would you rather wear yourself out by 65 and have a high networth or be more laid back and enjoy other things through life but have a lower net worth. You have to decide, but I notice a lot of discussions regarding depreciation seem to revolve around networth. And I think it is really valid to ask if networth is a key management data point for someone who operates their own business. And let me add in the fact that your net worth is going to be heavily influenced by inflation.
One thing most articles fail to mention is a well used piece of equipment that still get the job done, but is no longer depreciable is perhaps the most valuable piece on the farm in that it makes the most profit. Yet no article mentions this. It is always the fear of "it may break down". And as you guys have found yourselves, that is easy enough to counter by having a second one. The thing is, this plan doesn't add to net worth very much.
So there are a couple things to pay attention to in various articles that are assumed to be statements of fact - you need to manage for maximum net worth and you need to watch your tax burden. Yes, both are important, but are they the top items to guide management decisions. I would propose that more people get in trouble putting such things as priorities than those who don't.
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Post by serffarmer on Mar 31, 2021 19:46:00 GMT -6
I can't really find fault with those articles, much of that is good advice. Why wouldn't you sell equipment that you weren't using? Even if it's already depreciated you still have opportunity cost on the dollars invested in idle equipment, and eventually it will be worth the price of scrap unless it's Honda three wheelers or JD 4440's. Admittedly I know this because I haven't always sold stuff and it sat around too long, so I'm as guilty as anyone. My rule of thumb has been to "Never borrow money to buy a depreciable asset". Some may remember I had that as my signature on the old forum for awhile, but it triggered a lot of guys so I got rid of it. I do feel it makes sense though. I agree with your rule of thumb. It makes sense but there is no way possible I would have been able to put it into practice. Everything is just to darn expensive. Disclaimer : run no new equipment only used and most of it is well used haha.
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