What’s Agrequip about ?
The aim of Agrequip is assist the farmer in developing a forward capital budget plan for the replacement and upgrade of their plant and equipment moving into the future. All farmers know that major plant and equipment items used on a regular basis, to derive the farm income, wear out over time and need replacement.
As the items of plant and equipment age the level of the businesses production risk increases. This is not only the risk of break down at critical operational times it can also be as a result of inefficient application of inputs and losses at harvest. As a result replacement is always inevitable. Usually these decisions are made after a good year where there are surplus cash funds as it is a natural human trait to acquire new equipment when there are available funds. The problem with this strategy however is that it can increase financial risk as liquid cash assets are converted into illiquid assets.
Further more if the acquisitions are partly funded by equipment finance the farmer has committed the business to future cash outlays with out any knowledge of what future years maybe like .
Where problems arise in both cases is when the farm is faced with a poor year. The shortfall in cash now has to be funded by increased borrowings as the cash is now invested in a machine or it is required to meet finance payments. In either case there is an increases financial risk.
Another risk farmers face is where they own all of their of plant and equipment with no borrowings. Once again it is a natural human trait that we like to own our assets as opposed to borrowing to acquire them. Two of the major costs of acquiring and owning plant and equipment is the rapid decline in market value and the opportunity cost of not being able to spend the cash on acquiring another asset that may maintain or increase in value .
Farmers often fail to take into account and plan for the possible consequences of cash deficiencies and the capital cost of owning expensive plant and equipment .
The key in the whole exercise is to make sure the item of plant and equipment generates sufficient production income to compensate for this reduction in value and lost opportunity cost. Further to this there is a balance between how much of the plant and equipment the business should own and how much should be on finance . This varies for every business and has to be analysed business by business.
Farmer need to ask the question why do they need the equipment. Is it for an investment of is to perform a task ?
If it is to perform a task the most sensible approach is to ensure that it performs that task at the lowest possible cash cost.
How’s does Agrequip work ?
The first stage is for the user to assess the age, condition and market value of their current investment in plant and equipment. They then formulate a projected plan as to how and when they intend to replace and upgrade this plant and equipment and how they intend to finance these acquisitions.
Once the data is entered the program produces a range of reports modelling the financial and production risks of the initial plan.
The second stage of the process the user can then alter the purchasing assumptions and funding options to arrive at the most efficient low risk financial and production outcome.To assist in this process the program contains financial calculators that allows the user to change a range of variables such as the amount spent, the timing the acquisition, the value of the trade in , the method of payment and the structuring of equipment finance contracts.
Up until recently, acquisition and funding decisions to replace or upgrade items of plant, have been treated as one off and have been left up to the farmer in conjunction with their family , peers, the machinery sales person or the farmers financial adviser or bank.
Unfortunately all these people have different roles in the process and few are fully aware of the overall current or projected financial position of the farmer.
Our program provides an opportunity for farmers and advisers to work collaboratively from a financial efficiency and risk point of view to ensure that these regular and inevitable decisions are well considered and formulated with a primary focus on production , profitability and financial and production risk reduction.
We recommend that machinery acquisition plans are reviewed each year as a part of the farm business annual planning review .
The overall aim is to reduce both production and finance risk and ensure the farm business is able to go about its business effectively efficiently and at the lowest possible cost per hectare or per tonne.