Buying depreciating assets.

[lazy farmer]

Not really sure where I’m going with this but I’ll ask anyway.
what thought processes do people have when buying depreciating assets for the farm business? . I’m at a point(I think I always have been) where the tax saving argument doesn’t wash with me.
So when buying depreciating assets what do folks consider if buying with debt. Is this machine going to return me more than the interest and depreciation? Is the machine going to save more than the above in time/labour /efficiency of the business. Or is it because either the old one is broken or simply I want it.
otherwise why do we buy depreciating assets with debt? Should we not be all be cash payers for such items ?
Just an early forming thought don’t shot me down too much !

 

[DairyNerd]

I think it's an interesting question. I don't tend to buy depreciating assets with debt, but for us the question is what can we get contractors to practically do and how can we minimise machinery costs past that.

A good example is our tanker. I can't get a contractor to spread my parlour washings as they go out every 3-4 days, more if it rains heavily. Is it efficient for a 60-70 cow herd to have a tanker, probably not, but its practical so we have one. To be fair I paid 900 quid for it 3 years ago and apart from a bottle of expanding foam hasn't cost me anything

Reverse example: I would love to have our own turner, rake and baler in terms of silage quality and control over timing of taking out paddocks for bales but judge that to be a step to far compared to our farm size. So we just compromise a bit on silage quality and timings for the lower machinery costs.

 

[frederick]

I think it's an interesting question. I don't tend to buy depreciating assets with debt, but for us the question is what can we get contractors to practically do and how can we minimise machinery costs past that.

A good example is our tanker. I can't get a contractor to spread my parlour washings as they go out every 3-4 days, more if it rains heavily. Is it efficient for a 60-70 cow herd to have a tanker, probably not, but its practical so we have one. To be fair I paid 900 quid for it 3 years ago and apart from a bottle of expanding foam hasn't cost me anything

Don't put that on here the EA will be around. Parlour washings should have 4-6 months storage nowadays.

 

[DairyNerd]

Don't put that on here the EA will be around. Parlour washings should have 4-6 months storage nowadays.

They will be over some day i'm sure, i'm not too worried. OAD early Sept to 20th December and don't milk 20th December to 1st March so it's not as bad as it sounds. In my opinion we pollute far less than many but they will tell me what they want and we will sort it.

 

[frederick]

Not really sure where I’m going with this but I’ll ask anyway.
what thought processes do people have when buying depreciating assets for the farm business? . I’m at a point(I think I always have been) where the tax saving argument doesn’t wash with me.
So when buying depreciating assets what do folks consider if buying with debt. Is this machine going to return me more than the interest and depreciation? Is the machine going to save more than the above in time/labour /efficiency of the business. Or is it because either the old one is broken or simply I want it.
otherwise why do we buy depreciating assets with debt? Should we not be all be cash payers for such items ?
Just an early forming thought don’t shot me down too much !

If machinery needed to be bought out of cash there would hardly be a contractor in the country.
If you do the numbers properly there is no difference between buying cash or on a loan. If you buy cash there is an opportunity cost lost in keeping the cash of potentially 5% and if your buying new there is probably some subsidised finance available so quite often buying cash will actually be more expensive.
However the machine must make a return either by meaning you can do a job cheaper than a contractor. Or you can do a job more timely than a contractor that also makes a return.
Problems with machines is the cost is getting so great and the temptation is to turn them over before they give you problems which makes the depreciation even higher.
Read 2 days ago that machinery in quarries etc are likely to have had their full purchase price spent on them in repairs before it's decided they should move on. Spending 120k on repairs for my latest tractor is food for thought and would definitely extend it's working life significantly.

 

[More to life]

I think i'm a similar age to lazy, I don't like to borrow to buy kit if I can help it. I don't buy second hand either. Net result is an ageing fleet. I saw my father do the same thing at a similar age.

 

[M-J-G]

Not really sure where I’m going with this but I’ll ask anyway.
what thought processes do people have when buying depreciating assets for the farm business? . I’m at a point(I think I always have been) where the tax saving argument doesn’t wash with me.
So when buying depreciating assets what do folks consider if buying with debt. Is this machine going to return me more than the interest and depreciation? Is the machine going to save more than the above in time/labour /efficiency of the business. Or is it because either the old one is broken or simply I want it.
otherwise why do we buy depreciating assets with debt? Should we not be all be cash payers for such items ?
Just an early forming thought don’t shot me down too much !

I generally only buy what I can pay for, and I'll often buy something when I'm not backed I to a corner as opposed to when something completely let's me down and I have to replace it.

My worst deals have been ones I've been forced into doing, and the best ones have usually been the ones I'm not bothered about.

 

[dinderleat]

Jfdi if it makes your life easier, but for reducing your tax liabilities I agree it’s not the best idea there are other options available pensions etc. but you also need to take into account the long term future of the business if there isn’t a successor replacing kit might not be a priority but if you come to retire there will be more money in stock/machinery to be able to be sold very tax efficiently on retirement.

 

[Farmer Keith]

Very tricky to switch from one system to the other, we’re in the don’t borrow money to spend on depreciating assets camp here, never have never will.

Was chatting to another farmer in the other camp in March though whos payments were crippling him apparently, for him to change would effectively mean waiting till all the current payments were cleared, start saving then you’re a cash buyer, yet that could take 5 years, what do you do in the meantime? Once they’ve got you they’ve got you.

 

[Will Blackburn]

Try justifying none tax depreciating assets, that depreciate for a farming business.

 

[frederick]

Jfdi if it makes your life easier, but for reducing your tax liabilities I agree it’s not the best idea there are other options available pensions etc. but you also need to take into account the long term future of the business if there isn’t a successor replacing kit might not be a priority but if you come to retire there will be more money in stock/machinery to be able to be sold very tax efficiently on retirement.

What bit am I not getting my head around on tax efficient sale of machinery at retirement.
Surely all the machinery will have a book value and that book value will be significantly less than the sale value with current allowances it will likely be zero. So the entire sale is taxable or do you get to apply entrepreneurs relief or something similar. If so it might only be tax efficient until a budget changes it.

 

[Ducati899]

We will only buy machinery when/if we can afford it at the time and will pay out of cash flow other than the larger tractors and telehandler,just changed 4 year old scraper tractor and agreed with dealer half on delivery and half the month following, we do most deals that way and as long as you don’t take the pee on payment most dealers seem fine with it

 

[Henarar]

A lot of mine won't depreciate as long as the scrap price stays up

 

[som farmer]

its very easy to fill a yard up with new shiny paint, and convince yourself its needed.

l recall our accountant saying, at the SW Dairy event, that they do the books for a lot of contractors, and profits are exceedingly 'thin'. So why do farmers think they can do it themselves cheaper than a contractor ?

which is probably very true. However, timing can alter that equation, sometimes it is better to get a 'job' done, on time, than be in a contractors queue.

we have slowly built up a basic machinery arsenal, mostly 2nd or 3rd hand. The most important, by a very large margin, is a vaaderstat drill, that paid for itself easily in year 1, but its the ability to go and patch pastures, d/drill, min-til, at the correct time, that makes it so helpful. We even dd cereals with it.

lts fine if you know a machine will reduce contractors bills, cost/convenience, effectively. But to buy, to save on tax, often better to pay some tax. Even though we hate paying it !

 

[box]

If you're farming to make money, everything you do has got to make financial sense. If you're faming for the "lifestyle" then it doesn't really matter, as long as it makes you happy.


Here's my take on it:

A wise man once told me, "Grow the grass, milk the cows. You don't make money sitting on a tractor".

Tractors/machinery: It's almost never worth buying any depreciating asset, you're better off buying near end of life equipment and "adding value" by fixing it, tidying it up and doing your own spannering so it will at the very least hold its value and will (hopefully) cost you very little to run.

What works for one won't work for another. If you can't fix stuff, you're going to be forced to spend more up front and wear the depreciation and lost interest.

Contractor profit margins are so low at the moment, it's barely worth doing anything in house (apart from feeding out and topping).


Milk plant/dairy shed expenses/automation: Right place, right time, right price, you can't go wrong. I personally prefer to spend more up front and buy new, because I can't be bothered dealing with the bullsh*t of half working equipment at milking time. New ACR's, new collars, new SCC detection, new drafting gate, new walkover teat sprayer.

Is it worth it? On paper, no. But it saves a labour unit, which in itself pays most stuff off within a season. Reduced milking time is also a big money saver.

All of the above can be purchased on the second hand market for a fraction of the new price, but will come with the headache of needing servicing/repairing before it's installed, teething problems after installation etc. Go back to my original comments re. machinery : can you fix stuff yourself?

Buying "like to haves" while in debt should be kept to a minimum IMO, unless you can be absolutely certain it's going to make you money. In dairy farming, there are very few things that make money, apart from cows and grass.

 

[som farmer]

the only time a dairy farmer makes money, is actually when physically milking. Everything else is a cost, that you hope will be paid for, by milk.

 

[lazy farmer]

Again very basic here. But to state the obvious when the sh!t hits the fan and payouts are low it’s servicing debt and repaying that really hurts but unless the debt is land then the repayment costs on the depreciating assets should have made us more efficient so if they haven’t were they poor purchases that didn’t save labour time cost etc or have we bought Machinary etc that we should have saved up for in the first place. I am coming fast to the conclusion that our business model(ours and the industry at large) was either wrong or is now broken.

 

[crashbox]

Not really sure where I’m going with this but I’ll ask anyway.
what thought processes do people have when buying depreciating assets for the farm business? . I’m at a point(I think I always have been) where the tax saving argument doesn’t wash with me.
So when buying depreciating assets what do folks consider if buying with debt. Is this machine going to return me more than the interest and depreciation? Is the machine going to save more than the above in time/labour /efficiency of the business. Or is it because either the old one is broken or simply I want it.
otherwise why do we buy depreciating assets with debt? Should we not be all be cash payers for such items ?
Just an early forming thought don’t shot me down too much !

If no-one took on debt to purchase depreciating assets, there would barely be a contractor in the country!

If it makes business sense, be that in time, money, or work-life balance, and you can afford it, crack on.

 

[box]

so if they haven’t were they poor purchases

Good times or bad, if the purchase hasn't saved you time, money or made you more efficient, it was a poor purchase. But refer back to the opening statement in my last post......not everything has to be a good purchase, it all depends on what make you happy and what your priorities are.

or have we bought Machinary etc that we should have saved up for in the first place. I am coming fast to the conclusion that our business model(ours and the industry at large) was either wrong or is now broken.

There are a lot of people in a lot of industries (not just farmers) that have failed to live within their means and the metaphorical chickens are now coming home to roost.

 

[box]

If no-one took on debt to purchase depreciating assets, there would barely be a contractor in the country!

A contractor earns a living from the depreciating asset. A dairy farmer doesn't.

A dairy farmer taking on debt to purchase a depreciating machine that's going to do very little work and then sit in the shed for 11 months of the year doesn't often make any financial sense. Now that money is so expensive, it doesn't even work out to buy the machine outright to do the job.


On a related note, I don't know what it's like on your side of the world (I assume you're UK based), but down here the contractors are dropping like flies and shutting up shop.