To make good decisions about machinery, farmers need a strong understanding of their business, the key costings and all of the available options.
However, it is possible to get so caught up in the day-to-day running of the farm that such decisions are made in a rush, especially at a busy and stressful time of the year, such as harvest.
Farmers Weekly asked Harriet Cartwright, farming consultant at Strutt & Parker, Salisbury, what farmers considering changing the structure of their business need to take into account.
See also: Ultimate guide to buying a tractor 2019
‘Trigger events’ are often unpredictable and can be caused by a number of external factors, such as the world market, politics, eroding farm infrastructure and the availability of land.
They can also provide the perfect opportunity to take stock of your business and make a change.
1. A machinery breakdown
Don’t just send the machine off for repair without first considering your options.
- Buying a like-for-like replacement While this should prevent a repair bill in the near future, it requires capital expenditure. Carry out a feasibility test to see if your business can withstand the cost. If not, you may have no choice but to repair it. Speak to your accountant about the tax benefits of using capital allowances against taxable income. Look into grant and funding possibilities, such as the Countryside Productivity Small Grant Scheme or R&D tax credits.
- Enter a contract hire agreement to replace the machine This way a piece of machinery is owned by a hire company, the farmer pays a contract hire charge plus the fuel, and the hire company is responsible for all other costs, such as servicing, repairs, and depreciation. This removes the burden of servicing your own machine and allows your time and skills to be better used elsewhere. However, you do not own the machine.
- Sell the broken machine and outsource the operation to a contractor This depends on which machine breaks. For example, this would work with a hedgecutter, because it is only used a few times a year. The outsourced task can be done quicker by the contractor and it allows you to work on other tasks. This needs to be considered carefully for more time-sensitive operations, as the contractor cannot be in two places at once.
- Sell all the remaining equipment and instruct contractors – either on an operation-by-operation basis or on a contract farming agreement (farming in-hand and using contractors for labour and machinery, with the farmer providing access only for the purposes of the contract). The benefit here is the capital from selling the machinery, but the consequence is reduced control over the timing of the operations.
2. Incorporating a specialist crop into your rotation
- Before making a big purchase, such as a maize drill, bear in mind the following points. Is your new rotation sustainable in the long term, both with good husbandry and constant, certain demand? Depending on its significance (contribution to gross margin and the machinery required), it may be worth instructing a contractor to carry out the drilling.
- Alternatively, hire a machine on an hourly basis or on a fixed-time basis – this could be a set number of months over harvest, for example. Discuss this with your accountant, as hire costs are considered a trading item. These options prevent excessive capital being tied up in machinery that has a limited use.
3. Changes in the team
- When a staff member leaves, consider whether to replace them or downsize the amount of equipment to fit the smaller team and outsource the difference to a contractor.
- When replacing machinery, think about the technical ability of your labour force. While working with advanced technology can be taught, some team members may feel out of their depth or think it unnecessary.
4. Increase in acres
- Extra acres will increase income and help spread your fixed costs, and may justify owning a piece of machinery you previously hired. Alternatively, you could share an expensive piece of machinery with a neighbour, helping spread the cost for both parties over even more acres.
5. Decrease in acres
- Consider letting the land on a farm business tenancy, sharing your equipment with a neighbour, instructing contractors to carry out the operations or entering a contract farming agreement. Review this in line with your objectives and in consultation with your accountant.
Farm acreage and staff rules of thumb
Less than 200 acres It is possible to employ one person at this acreage, who may work partly on the farm, but also has other responsibilities, such as topping verges and hedgetrimming.
Perhaps a few pieces of machinery should be purchased, but it can be hard to justify spreading the cost of owning all the machinery required across this number of acres.
Alternative options are to let the land on a farm business tenancy or instruct contractors for all or some of the operations.
This depends on your objectives, desire for control and the relevant tax implications.
200-1,500 acres This can justify one worker who carries out the majority of the work, but rather than owning all of the necessary machinery, it may be worth outsourcing some of the operations or having a contract farming agreement over the whole farm.
More than 1,500 acres This can justify two full-time workers who carry out all of the operations, which, over this scale, makes it more viable to own your own machinery.
This depends on the skill set of your labour force and assurance of machinery repairs.
The table below shows that when comparing a contract-hired combine with an owned machine with a 9m+ header over a five-year period, you are £13,000/year better off by owning your own combine.
1. Altering overdraft/loan facility
Whatever the reason behind doing this, don’t forget to evaluate your ability to service any hire purchase (purchasing a piece of machinery and paying for it in fixed instalments over an agreed term) or contract hire payments.
If you currently own all your machinery, will you still be able to afford unpredictable and potentially large repair bills?
2. Compatibility of farm buildings and machinery
When upgrading machinery, do not overlook the relationship between your machinery and storage facilities.
For example, a dryer and grain store that cannot keep up with the output of your new combine will give your team headaches during harvest and may result in valuable combining days being lost while your dryer is trying to keep up with yesterday’s wet grain.
Also consider the practicality of storing your new combine in older, smaller buildings.
One option to combat this is to change your grain marketing strategy at harvest – for example, leasing additional storage to alleviate the pressure or entering marketing pools with storage facilities.
Knowing your operation costs or key performance indicators and being able to benchmark against comparable businesses will highlight your weaknesses so you can target these areas and consider change.
For example, in comparison with smaller farms, you may have a particularly high cost for ploughing.
Therefore, you could consider selling your plough and outsourcing the operation to a local contractor or sharing a neighbour’s plough. In other situations, hire purchase or contract hire might reduce costs.
4. Machinery sharing
Sharing kit with your neighbour is all well and good if you have the type of relationship that could withstand it, but this may not work for everyone. Speak to your neighbours to gauge their interest.
You could go even further and combine the cropping across the farms in the joint venture. Seek advice from your accountant, tax adviser and solicitor before entering any type of agreement, whether formal or informal.
When considering taking on more acres, upgrading the capacity of your combine or building a new grain store, consider building in extra capacity to help future-proof any further expansion or increase in yields.
There are many ways to hire and own machinery. Trading in your old machine can be a great help towards an upgrade. Some companies offer manufacturers’ finance, which should also be reviewed.
Machinery can be financed in multiple ways: capital expenditure from reserves; overdraft; loan; contract hire or hire purchase. Buying second-hand requires less capital, but you can’t benefit from manufacturers’ finance.
Consultation with your accountant is key, as timing can be crucial in tax considerations.
7. Review objectives
Machinery policy needs to be reviewed in association with wider structural questions. Different business structures have their own advantages and disadvantages.
Depending on your objectives, the options are: to let or farm in-hand (where there are a number of variations).
- Let land on a farm business tenancy – suitable if you are not interested in having control over your land. Offers less risk from volatile markets. Consider the tax implications of being a landlord as opposed to a farmer.
- In-hand farming – this offers much more flexibility and control over your land, but exposes you to volatile markets. The tax treatment for the following four forms of in-hand farming is different from being a landlord of a tenancy and needs to be discussed with your accountant.
- Complete self-sufficiency by employing full-time staff and owning your own machinery or using hire purchase agreements. You retain control (key for some farmers), but it depends on the scale.
- In-hand farming using contractors – also known as contract farming agreements or stubble-to-stubble agreements. Control is retained without capital being tied up in machinery ownership.
- In-hand farming and working with your neighbours, such as sharing machinery or a trained employee. On a larger scale, you could even consider a joint venture involving the creation of a separate business of people and machinery to act as contractors to the joint venture members.
- In-hand farming with some use of contractors to carry out operations (invoiced per operation) or to carry out specialist tasks, such as high-clearance work or manure spreading.
8. Operation costs
These are not always easy to identify, so farmers rely on industry figures such as National Association of Agricultural Contractors or the Central Association of Agricultural Valuers costings (which don’t specifically relate to your farm, but can be better than nothing).
Once known, they can help you understand the difference in cost between one operation and another, such as when changing establishment methods or to compare one crop or a piece of machinery with another.
Six top tips
1. 10- to 15-year machinery replacement plan Have one in place to plan for repair bills, spread capital expenditure and help with budgeting.
2. Benchmarking and use of industry figures Being able to measure your costs with other farms or from year to year can only help when it comes to making a change.
3. Budget and cashflows These should be reviewed with your accountant at the start of your financial year. Additionally, your financial results can be looked at on a three- to five-year basis. This helps confirm continuing viability, as well as adequate cashflow for repayments and capital expenditure.
4. Trigger events Recognise when one arrives and don’t delay in dealing with it. Continually review your objectives to ensure they are fit for purpose, particularly in terms of generational changes.
5. Consult partners/directors Show your workings and be prepared to justify your proposal – not just with family, but also your accountant or bank.
6. Staff Involve them in your thinking and decision-making.