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Farmers buying more new iron
Farm incomes are surging. As a result, so too are farmers' machinery investments, according to a recent report.
It could be because they're replacing older equipment that "was not replaced earlier in the decade due to lower income levels" or aspirations to keep up on the latest technology to continue to push the envelope of crop profit potential. Whatever the reason, per-year machinery investments are expected to jump above the approximately $90,000 farmers have spent, on average, on corn and soybean farms in the Corn Belt, according to University of Illinois ag economist Paul Ellinger.
"The increase in capital purchases was partially triggered by the increases in net farm income starting in 2007. Due to the improved cash flows, some farmers were catching up replacing older equipment that was not replaced earlier in the decade due to lower incomes levels," Ellinger says. "Others took advantage of the increased liquidity and depreciation tax laws to manage their income tax liabilities. Advances in equipment size and technology have also provided motivation to increase equipment purchases with the goal of increasing efficiency and timeliness of field operations."
As farm size increases, the percentage of total revenue spent on machinery does decline. For example, on a 500-acre farm in Illinois, Ellinger says, the value of the farm's equipment is around $485/acre. That number dips to $395 for a 2,500-acre farm. That range is about $150/acre higher than it was 5 years ago.
"On a per acre basis, debt used to finance machinery purchases does not vary substantially by farm size varying from $60 to 80 per acre," Ellinger says. "Moreover, there was negligible increase in intermediate debt financing from 2006 to 2010 indicating much of the increase in capital purchases was financed with cash."
And, the increase in new iron purchases is trickling into the used machinery market, too. The demand created by the growth in machinery purchases has the used market moving higher, too.
"Used farm machinery has also maintained market values contributing to the strong levels of machinery held by farmers," Ellinger says. "High agricultural profitability is a primary driver in maintaining these capital purchase levels and facilitating a strong used machinery market."