Big changes in equipment investment ratios

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Highlights

  • From 2014 to 2016, the base model four-wheel-drive tractor increased in price by nearly $100,000
  • Drop in the value of the Canadian dollar is main reason for the dramatic price increases
  • Track the market value of your equipment as compared to your gross revenue per acre
  • New or used, costs are likely to be significantly higher compared to upgrades 2 or 3 years ago

The price of new farm equipment has risen rapidly in the last couple of years, putting upward pressure on fixed costs for producers.

Alberta Agriculture tracks farm input costs and publishes the results monthly on their website. Between March 2014 and March 2016, the base model four-wheel- drive tractor in their survey increased in price by nearly $100,000. The base model combine was up a similar amount.

Sizable increases have also occurred in new balers and mid-size tractors, driving up costs for livestock producers looking to upgrade.

Economists advise farm managers to keep their machinery investment ratio below 2:1

Industry observers cite the drop in the value of the Canadian dollar as the main reason for the dramatic price increases. More stringent Tier 4 emission standards have also pushed up prices for diesel engines.

For new equipment that has been sitting on dealer lots for some time, prices may be somewhat less than anything new coming out of the factory, but in general terms new equipment values have accelerated rapidly.

That has helped demand for used equipment, thereby reducing inventory.  As a result, those prices are expected to rise as well. For anyone upgrading equipment, whether new or used, costs are likely to be significantly higher compared to upgrades two or three years ago.

Track market value of your equipment

As a business management specialist with Alberta Agriculture and Forestry, Ted Nibourg analyzes machinery investment costs. He recommends tracking the market value of your equipment as compared to your gross revenue per acre.

According to Statistics Canada data, Alberta farmers had $8.25 billion invested in machinery in 1998. This increased steadily to nearly $12.8 billion by 2014, the last year for which statistics are available. At that level, machinery investment in the province averaged $253 an acre. This is an average for both crop and livestock producers, but it’s generally assumed that crop producers have a higher investment per acre.

Keep ratios below 2:1

Nibourg estimates the average Alberta crop producer in 2014 had a machinery investment roughly equivalent to their annual gross income. Back in 2003, when revenues were much lower, the ratio was well over 2:1 – an average equipment investment more than two times greater than annual gross revenue. The average ratio from 1998 to 2014 was 1.56:1.

While machinery investment has steadily increased, gross revenue has increased even more rapidly in most years, so the ratio has declined. However, gross revenue can be highly volatile. “Economists advise farm managers to keep their machinery investment ratio below 2:1,” Nibourg notes.

READ: Projecting 2016-17 Farm Receipts and Equipment Sales

From an AgriSuccess (July/Aug 2016) by Kevin Hursh (@kevinhursh1)