Tuesday, February 18, 2014
Caught You! You Spendthrift!Tweet
The truth is known! The jig is up! Since 2006 you have had a secret relationship with your machinery dealer. You have acquired an expensive addiction to iron with new paint on it. In the past 7 years the amount of money you have spent on power has doubled. Why is that? Come clean now! “Because you could?” Oh. OK. Well, there must be another reason; come on, what it is? “Because the government wanted you to?” Oh, well, that seems to clear up things. You’re free to go, just watch yourself, now.
Having enough money to buy new farm equipment and a method to justify it provided by the IRS has allowed many farmers to fill their machine shed with new equipment and boost their investment in powered equipment at an exponential rate. University of Illinois ag economist Gary Schnitkey says the trend has been for higher capital expenditures on grain farms, but in a new era of lower commodity prices, the trend must change.
So, what are the costs that he is including in his indictment of your machinery habit? They include machine hire (payment for field operations such as spraying), utilities, repairs, fuel and oil, an depreciation. From 2000 to 2006 those were relatively stable in the $40 to $60 per acre range, but beginning in 2006, he says those increased:
1) $56 per acre in 2006
2) $68 in 2007,
3) $79 in 2008,
4) $78 in 2009,
5) $83 in 2010,
6) $86 in 2011, and
7) $113 in 2012
“Between 2006 and 2012, power costs increased by $57 per acre, a doubling of power costs over the period,” says Schnitkey. However, the primary indicator of what is happening is revealed with an expense breakdown:
1) Machine hire costs increased by $4 per acre,
2) Utility costs increased by $2 per acre,
3) Machinery repairs increased by $9 per acre,
4) Fuel and oil increased by $8 per acre, and
5) Machinery depreciation increased by $34 per acre.
“By far, the cost with the largest increase was depreciation, accounting for 60% of the $57 power cost increase between 2006 and 2012,” says Schnitkey. So machinery purchases have been the driver of higher power costs per acre. You may have wanted new GPS guidance systems or variable rate technology, and to get those, a new tractor or combine was required.
You were getting $7 for corn and $15 for beans, so why not spend the money? And you did. But ironically, the government’s accelerated depreciation method and Section 179 expensing fed your equipment habit all the more and you saw every reason to take advantage of it.
Yes, you now have a machine shed full of new paint which will be beneficial because it may be a number of years before you again find your way to the equipment dealership. But you also have demonstrated the tendency toward a trend that you will have to shed, if you are going to be able to use all of that new equipment. Buying new iron at the old rate will get you in financial trouble with $4 corn and $9 beans. But curtailing your investment will be a necessity. Schnitkey says it will be important to downshift from the $100 per acre of new capital purchases to the $40 rate which will parallel commodity prices that are beginning to prevail.
In the meantime, Schnitkey says “economic depreciation” instead of tax depreciation will help your budget considerably, “Generally, economic methods more closely match the life and services offered by equipment. As a result of using economic methods, machinery depreciation will remain high for a number of years because of previous high levels of capital expenditures.”
Higher commodity prices and beneficial government tax policies have allowed a substantial increase in per acre expenditures for powered farm equipment. Most of the expense has been in depreciation. With the drop in commodity values, the trend of new equipment purchases will have to reverse and the rates paid per acre will have to parallel those prior to 2006 when commodity prices began to rise.
Posted by Stu Ellis on 02/18 at 11:41 PM | Permalink