Buy, Lease, Custom Hire or Joint Venture?

By Dick Wittman, Wittman Farms, Inc. - 1/7/99 NW Direct Seed Cropping Systems Conference

Introduction

My assignment for this conference is to help you to answer a critical economic question:

"If I want to direct seed or no til, should I buy, rent, custom hire, or joint-venture with a 3rd party?"

Before addressing this question, I was asked to briefly discuss our experiences with no-til or direct seeding. I will begin by reviewing the mission of our farm, and describe how direct seeding contributes to the basic goals of our farm…

Wittman Farms - Mission Statement

As stewards of this farm, our mission is to produce high quality grain, livestock and timber raw commodities for U.S. and foreign customers in a manner that will assure:

--a fair rate of return on invested resources to our owners,

--a safe and fulfilling environment to work and live in, and

--a farm capable of producing sustained income for future generations.

We are very interested in direct seeding, because we feel it is making a major impact on our ability to achieve our mission and remain a SURVIVOR in agriculture.

Goals - Impacts of Direct Seeding

IMPACT: increased quality of life, higher return on invested resources

IMPACT: sustainable income for future generations

I don't need to dwell on the importance of Direct Seeding... you are all probably bored by now with no-til pictures and success stories. So, I will hit a few quick points on our experiences and then get to my assigned topic.

WFI history/evolution to direct seeding

- WW, SW/SB, Pulse, WW, Oilseed

(Slide captions) - no til fields: Sp’ 98 Peas with Sp Durum in Background; spring rape; WW-on AW Peas-minimum til compared to WW-Notil into Sp canola; AW Peas Notilled into Sp Durum

Direct Seeding Results

Biggest concerns

Now back to the question:

"Should I buy, rent, custom hire, or joint-venture with a 3rd party?"

Several Important Considerations:

Let’s examine the first consideration…. Optimum Financial/Economic Decision

The academicians would tell you the answer is simple: Just pull out your old college ag econ notes and do a Breakeven analysis using marginal costs, marginal revenues and all that jazz…..RIGHT. Show BEP graph….(Custom Rates, Table 1, page 2)

Concept is simple. The CHALLENGE is: "How do we laymen apply this theory without a PHD in finance? All kinds of drill costs and configurations and no two farms alike in size or finances.

….(Story:… Father dies, leaves 17 cows to 3 sons in his will) …

To apply this concept we need to have some facts and make some assumptions that fit our own operation….then we need an analytical tool to crunch the numbers. Fortunately, some very talented individuals have already done this for us. I will illustrate several examples during the remainder of this presentation. Much of this information was developed using techniques described in the following sources:

Before I go into Buy vs. Rent vs. Custom Hire, I want to take a short detour and look at costs per acre for some typical tillage operations comparing CONVENTIONAL VS. DIRECT SEEDING systems.

 

Table 1 - Selected Custom Rates for typical tillage operations

Tillage Operation

Range

Average

Shank in fertilizer $7.50-11.58

$9.03

Moldboard Plow $5.00-15.00

11.00

Chisel Plow $5.00-$10.00

$7.00

Disk $$6.00-7.50

$7.00

Cultivate $5.00

$5.00

Harrow $2.00-5.00

$3.50

Conventional Drill $5.00-8.00

$6.60

No Til Air Drill $20.00-25.00

$22.50

Table 2 - Costs/Acre - Minimum Tillage - WW on Pea Ground

Operation Cost/Acre
Rip in Fertilizer

$9.00

Culti-weed

5.00

Seed + Dry Starter-Conv Drill

12.00

Total Cost Per Acre

$26.00

   
vs. Custom No Til

$22.50

Table 3 - Costs/Acre - Conventional Seeding - Spring Peas

Operation Cost/Acre
Fall Plow

$11.00

Spring Harrow

3.50

Spring Cultivate

5.00

Cultivate/Spray Incorporate

5.00

2nd Incorporate-Cultivator

5.00

Seed-Conventional Drill

10.00

Harrow

3.50

Roller/Packer

3.00

Total Costs Per Acre

$45.50

Table 4 - Costs/Acre - No-til Seeding System - Spring Peas

Operation Cost/Acre
Fall Harrow stubble

$3.50

Sp Harrow - Granular Chem Application

5.00

Seed No Til

20.00

Harrow (Optional)

3.50

Roller/Packer

3.00

Total Costs Per Acre

$35.00

CONCLUSION: It is often cheaper to no til rather than conventionally seed, even if we have to custom hire the job done.

Now, back to the question…."Should we custom hire, rent, or buy the drill?" To address this question, we first need to look at the component costs associated with each of these options:

Ownership Option

Rental/Lease Option

Custom Hire

Now let’s look at some real life examples illustrating owning vs. renting. For illustration, let’s use a JD 750 15’ No Til Drill. Table 5 below contains assumptions needed to compare these options:

Purchase Option  
Purchase Price $53, 750
Down Payment (30%) 16,125
Loan Repayment Period (yrs.) 5 years
Annual Payments (10.15% interest) $9,963.44
Salvage Value - 5 years $22,500
   
Lease Option  
Lease Length 5 years
Annual Lease Fee $11,854
   
Short Term Rental Option  
Rental Fee ($/acre) $14.00
Annual acreage seeded 800 acres

 

Task #1 - Calculate the breakeven or threshold level for owning vs. renting the drill.

Solution #1 - Simple Formula Method - Break-even Analysis

Break-even Acreage = Annual Ownership Costs____

Custom Rate/Ac - Operating Costs/Ac

Annual Costs = depreciation, interest, taxes, insurance*, and housing

= $6,450 + $3,870 + $572 + 0 + $0

= $10,892

Rental rate/acre = $14/ac Operating Costs (Maintenance) = $3/ac

Break-even Acreage = _$10,892_ = 990 Acres

$14 - $3

* Insurance costs of $197 not included, as this is a common cost of own, rent or lease

Task #2 - Assuming an annual usage of 800 acres, compare the cost of purchasing, leasing, and renting the drill taking into consideration different times values for annual cash inflows and outflows. (Refer again to the basic cost data related to each option in Table 5)

Solution #2 - Use computer model that projects after-tax cashflows for each option and discounts to a net present value.*

* (Program software for capital asset analysis program is called BUYORLEA Vs. 2 available from WSU, Dept C, PO Box 645912, Pullman, WA 99164-5912 at a cost of $25 payable to WSU.)

(Optional: Scan in Tables showing detail of after-tax outflows each year)

Table 6 - Present value of after-tax cash outflows for no-till drill financing alternatives.

 

Alternative

PV-After Tax Outflows

Purchase

$38,536
Long-Term Lease

44,043
Short-Term Rental

35,142

Conclusion: Rental is most economical option. The $3,394 savings over five years is less than a dollar per acre, assuming 5 years at 800 acres. Leasing is the most expensive option.

Custom Hiring - When is it appropriate?

…You can often make a strong argument for pairing up with someone who can shorten your seeding season, particularly when weather problems narrow up seeding windows.

Other Applications - Determining "Own vs. Rent" Threshold Levels

Table 7 - Costs per hour to Operate 30’ Level Land Combine - $177,000 new cost in 1996

Hours of Use

Cost Per Hour

100

$258.45

200

149.85

300

125.56

400

111.39

500

101.85

 

Table 8 - Costs per hour to operate 330 HP Rubber Track Caterpillar Tractor

 

Hours of Use

Cost Per Hour

200

$137.52

400

78.38

600

59.81

800

51.37

1000

47.00

Watch out using these tables! These are an economist’s calculations based on assumptions provided by dealers and farmers. What is most critical here are YOUR NUMBERS.

(Show alternative analyses with used equipment and actual cost figures to demonstrate how Breakeven Threshold levels can change – no til drill, tractor purchase). Stress importance of using professionals (accountants, extension, consultants, etc.) to help analyze economics of OWN vs. RENT vs. Custom Hire. Look at dollars at stake….

Optional Issues

Joint Ventures/Partnering Situations

Potential Equipment Trade Areas – best fit is when cooperative approach improve economic feasibility or lowers cost of production compared to independent efforts

 

Setting Up Joint Arrangements

Issues to Cover in Agreements (9-10 issues, mostly common sense)

Fair Market Rental Value Issues

Summary and Conclusions:


 

Dwdspro.doc