Agriculture and Natural Resources, Institute of (IANR)
Date of this Version
2-4-2009
Citation
IANR News Service: News and Publishing, Institute of Agriculture and Natural Resources, University of Nebraska-Lincoln, P.O. Box 830918, Lincoln, NE 68583-0918. http://ianrnews.unl.edu/static/0903180.shtml
Abstract
With rising ag machinery and equipment costs, some farmers are considering leasing versus buying. However, there are many pros and cons to address before making the decision, a University of Nebraska-Lincoln Extension educator said.
The National Agricultural Statistics Service reports that machinery and equipment expenses and fuel expenses have gone up nearly 25 percent the last two years, said Tim Lemmons, UNL Extension educator in Cass County.
"Economic efficiency is paramount to profitability in crop production operations," Lemmons said. "When assessing whether to buy or lease ag machinery for your operations, you'll want to understand the factors affecting the economics as well as compare the financial aspects of each option."
This and other cost saving tips to help deal with high input costs in crop production can be found at UNL's Surviving High Input Costs in Crop Production (http://cropwatch.unl.edu/survivinghighinputcosts.htm) Web page.
Some advantages of leasing equipment include: lower up-front, down payment costs compared to purchasing; payments often are less than traditional loan payments; less liability on the balance sheet; equipment available for short-term needs; access to and use of latest technology; and lease payments are considered production expenses for tax purposes.
Some advantages of buying equipment include: owned equipment may be easily replaced or sold at the owner's discretion while replacing leased equipment may be more difficult; owned equipment has asset value and may be used as collateral against other loans; purchases do not require security deposits, although down payments to secure financing may be higher; purchased equipment has no use limitations while some leases specify the number of hours a machine may be used before a penalty is imposed; and increased asset value on the balance sheet.
"Deciding whether to buy or lease equipment requires that you understand some base characteristics and how they affect cash flow and asset management," Lemmons said.
The most difficult to evaluate is depreciative cost of equipment over time. Depreciation is defined as the decline in asset value over time. It also represents the basic ownership costs of a capital asset and the consumption of an asset's value over its useful life.