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The Silver Lining to Used Equipment Prices
Since the summer of 2014, the value of low-hour, late-model, and large machinery has been on a downward spiral. A recent analysis of the dealer asking prices for such items as combines, high-horsepower tractors, grain carts, and tillage implements, however, finds that trend has bottomed out. The 2018 price projection figures bear testimony to this fact.
These projections are based on recent dealer asking prices. The values were compared with similar price analyses featured in the magazine the last several years. The general bottoming out of dealer prices brings to an end a growing gap that has occurred over the last four years between the relative value of equipment vs. new stock. Prices now being asked by dealers or given at auction sale for late-model and large machinery are 35% to 40% lower than in 2014.
This is a bad news/good news situation.
The bad news is that the value of equipment is less than in the past, and this has slashed your borrowing leverage at the bank.
The good news is that the marketplace offers an ample fleet of late-model, large machinery being sold at historically low prices. Prices like these haven’t existed since the mid-1980s (relative to inflation) and likely won’t be seen again in decades.
The good news doesn’t end there. The late-model machinery you buy today could hold its value into the near future and possibly appreciate in value. “We certainly have seen this happen in the past, such as what happened to combines in the mid-1990s,” says Tim Meyer of Steffes Group.
Iron opportunities don’t end here. Dealers are offering low-interest financing, extended warranties, and the opportunity to lease late-model, large iron, which means even more savings.
Put a Sharp Pencil to Your Steel Fleet
Repercussions of the free fall in the values of large, late-model machinery in the past four years also affects your borrowing power at the bank. This could lead to disagreements with your banker about how to value your fleet. For this reason, you should hit the internet this winter to “prove up” your fleet’s value.
“The first thing you have to do is identify what you are valuing,” says Larry Perdue, an accredited senior appraiser with the American Society of Appraisers (ASA). “Unlike the Kelley Blue Book, which lets you add in all the options on a car and obtain a value, the price listed for a tractor is usually the base price. So you have to add in all the options it may have like wheel weights, electronics, extra lights, additional hydraulic spools, and transmission options. Those add to the original cost and the retained value.”
Other situations in which equipment appraisal can be valuable include insurance coverage, financial planning, state and gift taxes, partnership dissolutions, litigation, and divorces.
Perdue will be the first to admit that professional appraisals by an ASA-certified appraiser cost a fair amount of money. The first appraisal and inventory will also be more expensive than any updates. The important thing to know is whether you’re comparing apples to apples or fair market value to forced liquidation value. “There are a lot of people who do appraisals, and there are a number of ways you can get what we call an ‘unresearched value,’ ” Perdue says. “When certified appraisers give an appraisal, they actually assume the liability with the bank, IRS, or whatever other agency is involved to ensure that the equipment is worth what they say it was worth.”
The other option is to establish the current value of your equipment by going to the internet and researching recent auction sales. Sites such as tractorhouse.com, rbauction.com, and ironsearch.com allow you to search for recently sold equipment by make, model, year, and location. You can further qualify comparisons by selecting auctioned equipment that has hours and accessories (weight packages, duals, tracks, transmission options, or precision ag equipment) that are similar to your machinery.
Another source of equipment values based on dealer sales of used machinery is offered at Iron Solutions, which also operates the Iron Search website mentioned before. Equipment dealership and banks have used this location to obtain up-to-date valuations. Choose to purchase Iron Solution’s Iron Guides or order a custom appraisal.
Managing Machinery Costs
Keeping machinery costs contained within the financial corral best suited to the size of your operation is an ongoing juggling match, to say the least. “This is always going to be a hassle for producers,” says Allen Graner, a longtime North Dakota Farm Business Management (FBM) instructor.
Working with FBM participants over several decades, Graner has heard firsthand these questions: Should I trade tractors now or hold off? Should I upgrade combines? Should I downsize my equipment? Should I run longer days in the field?
“Managing machinery costs is just as important as managing any other input cost,” Graner says. “Over the last few years, we’ve seen increases in machinery costs and general overhead costs, and the biggest culprit seems to be a lot of upgrading in order to access better technology. It comes with a price, though.”
According to the 2016 FBM report for the south-central region of North Dakota, FBM participants’ machinery costs comprised 21% to 23% of total direct and overhead costs.
A fine-tuned analysis of the records by breaking down the costs according to producers’ profitability shows a marked difference in machinery costs between low- and high-profit producers. “In 2016, the low-profit corn producers in our region had machinery costs of $124.70 per acre, and their total cost per acre was $521.12,” says FBM instructor Jory Hansen. “The high-profit producers had a machinery cost of $70.04 per acre and a total cost of $366.77 per acre. They spent $54 less per acre on machinery inputs than the low-profit participants.”
The records show a similar disparity between low- and high-profit producers of soybeans. The low-profit soybean growers had a machinery cost of $87.66 per acre, with a total cost of $340.33 per acre. The high-profit soybean producers, on the other hand, had a machinery cost of $57.93 per acre and a total cost of $262 per acre.
The profitability of the high-profit producers tends to result from higher yields overall and lower input costs, in general. These producers tend to contain costs at every level, including each of the input categories comprising their machinery costs. “Machinery costs are made up of expenditures for fuel, repair, machinery leases, and custom hire,” Hansen says. “The big thing would be depreciation. Depreciation tends to account for the largest share of the machinery-cost category.”
The North Dakota FBM record-keeping system uses FINPACK software and its method of allocating depreciation. “When a producer purchases a new piece of equipment, we add it to the balance list of equipment; we depreciate the whole machinery line by 9% every year,” Hansen says.
Expenses are allocated to depreciation of equipment by crop, using the work units FINPACK assigns to various crops. Each crop’s typical mechanical needs for production, harvesting, and handling determine the work units assigned to the crop. Like depreciation, total costs for fuel and repairs are also assigned in proportion to each crop’s designated work units.
No one standard for all farms
It’s no surprise, of course, that there’s no standard carved in stone for managing overall machinery costs. It is, at best, a balancing act. Following are six questions the FBM records and instructors suggest might point to reduced costs.
1 Is my equipment of an efficient size? “The size of the equipment needs to match the size of the operation,” says Hansen. “Covering more acres could reduce the cost of owning a machine. Trading to a smaller model that will still do the required job may reduce equipment cost.”
2 Am I overequipped? “When crop prices were good, we saw producers buying a lot of machinery,” says Hansen. “One example is the self-propelled sprayer that we formerly saw owned primarily by custom applicators. We’ve recently seen some producers trading down to a smaller model.”
Graner, too, suggests reviewing equipment lines for pieces that might not be needed. He says, “A single operator might ask, ‘Do I need three big tractors and two combines when I’m only one person?’ ”
Taking a hard look at your line of tillage implements could lead to a further streamlining of equipment inventories.
Yet, goals and family needs play a role, too, in maintaining lines of equipment. As an example, Hansen points to the labor needs of his own family of beef producers, six partners all employed off the farm. Time is a precious commodity. “You have to think about the amount of time you have to do a given job,” says Hansen.
3 Is it time to trade? Just because a piece of equipment is paid for doesn’t mean it costs less to operate. Sooner or later comes the day when it must be replaced. Monitoring its trade-in value may help determine the cost-effectiveness of trading.
“Every year that you have a machine, its value gets closer to zero,” says Hansen. “When you lose too much in trade-in value, you face higher replacement costs, and that increases machinery costs.”
4 Is it the time to hold on to equipment? While trading one piece of equipment may be cost-effective, holding on to another may be a better choice. “If you bought a tractor in 2012, it’s costing less in depreciation every year,” says Hansen. “Just by maintaining the newer equipment that you have, you can reduce costs over time.”
5 Should I consider leasing equipment or hiring custom fieldwork? Either leasing or custom farming can reduce debt, but they do increase direct costs. A lease can also lower payments and money required up front to acquire machinery. Compared with the 10% to 20% down payment required on an installment loan, leasing generally requires only the first two monthly payments to begin.
6 Am I managing fuel and repair costs to the max? The FBM records for south-central North Dakota show that the high-profit producers of corn and soybeans have somewhat lower fuel costs than the low-profit producers. They also have significantly lower repair costs.
This is one rule of thumb Graner offers for overall cost containment: “Always try to maximize all working assets, whether it’s machinery or breeding cattle,” he says.
Price Projections for 2018
DISKS: 3 to 5 years old, 30 to 34 feet wide
Inventories of late-model disks have undergone a correction in the past year with significantly fewer implements available. You can expect a run-up in their values just prior to spring 2018. The way a disk is equipped, particularly with finishing attachments, has a big influence on its asking price.
- Case IH 330
- $36,900 average price
- $32,000 to $51,000 range
John Deere 2623
- $48,900 average price
- $28,500 to $62,500 range
- Landoll 6230
- $39,500 average price
- $32,000 to $51,100 range
- Sunflower 1435
- $37,500 average price
- $32,500 to $44,900 range
2018 Price Projection: FLAT
FWD TRACTORS: 4 years old, 310 to 350 hp.
There are still significant inventories of high-horsepower FWDs available on dealers’ lots, particularly those built in 2013 and 2014. This is going to exert downward pressure on their asking prices. As a result, values on these tractors will be soft for the coming year, offering horsepower bargains.
- Case IH Magnum 340
- $185,000 average price
- $139,000 to $216,800 range
- John Deere 8320
- $225,200 average price
- $179,500 to $285,000 range
- New Holland T8.330
- $174,500 average price
- $140,500 to $283,000 range
- Massey Ferguson 8680
- $190,500 average price
- $170,000 to $215,000 range
2018 Price Projection: 5% DOWN
ROUND BALERS: 3 to 4 years old, 5×6-foot bales
The number of late-model, large used round balers has increased greatly, which is putting downward pressure on their asking prices. This situation offers a great opportunity to get a bargain on balers.
- John Deere 569
- $32,500 average price
- $20,900 to $51,000 range
- New Holland Roll-Bale 560
- $33,100 average price
- $24,500 to $42,900 range
- Vermeer 605N
- $31,000 average price
- $22,500 to $39,000 range
2018 Price Projection: 8% to 10% DOWN
4WD TRACTORS: 4 years old, 500 to 520 hp.
4WD tractors have been the best bargain available in late-model large iron in recent years. Their inventories were significantly trimmed in 2017, putting upward pressure on their asking price.
- Case IH 500
- $208,200 average price
- $150,000 to $276,500 range
- John Deere 9510R
- $254,700 average price
- $205,000 to $315,500 range
2018 Price Projection: 3% UP
COMBINES: 4 years old, Class 8
While supplies of late-model Class 7 combines have diminished greatly in the past year, availability of Class 8 harvesters is still ample. This is going to put downward pressure on their values since dealers are needing to get rid of inventories to encourage sales in new combines.
- Case IH 8230
- $259,900 average price
- $171,500 to $359,000 range
- John Deere S680
- $269,500 average price
- $189,000 to $400,500 range
- Gleaner S78
- $243,750 average price
- $201,000 to $289,000 range
2018 Price Projection: 4% to 6% DOWN
SELF-PROPELLED SPRAYERS: 3 to 4 years old, 90- to 100-foot booms, 1,000- to 1,200-gallon tanks
Supplies of late-model, self-propelled sprayers on dealers’ lots have been greatly reduced. As a result, low-hour sprayers are bringing higher prices on lots and at auction sales. Expect price increases if there is a price rally on corn or soybeans prior to and during planting.
- AgChem RG1100
- $193,500 average price
- $145,000 to $247,600 range
- Case IH Patriot 3330
- $183,100 average price
- $170,100 to $225,500 range
- John Deere 4830
- $220,500 average price
- $195,000 to $269,500 range
2018 Price Projection: 4% UP
Raylene Nickel also contributed to this article.