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Economist: Analyze Before Buying Equipment

Agricultural economist Herb Hinman leans back in his chair and grins as he tells about a farmer who came up to him after one of his economics workshops and told him, “Three years ago I went home and pushed a pencil on whether it would pay to buy a new pickup. I couldn’t justify it, so I didn’t buy it.

“The next year, I pushed the pencil again, and couldn’t justify buying the pickup.

“This year I pushed the pencil and still couldn’t justify it, but I bought the pickup anyway, because I wanted it. What do you think about that?” he demanded.

Hinman, who specializes in production costs, thought it was just fine providing the farmer could afford it.

There’s a difference, he explains, between needs and wants. To economists, needed equipment is equipment necessary to do the job, and that is economically justified. Often, Hinman says, wanted equipment is more equipment than necessary to get the job done, and isn’t economically justified.

Purchase of wanted equipment often leads to unnecessary financial burden. An example would be buying a $125,000 tractor to do a job that a well-conditioned $50,000 used tractor can do just as well, and more economically.

“However, if a producer wants the $125,000 tractor and has the resources to afford it without putting the operation in a financial bind, there’s no reason not to do it,” Hinman says. “After all, one of the reasons most people work is to enjoy some of the pleasures of life.”

Hinman just hopes farmers will do their homework and differentiate between needs and wants before making decisions.

The question of equipment purchases came up as we were discussing the $5 billion in emergency assistance recently appropriated for American farmers. Washington farmers who had production flexibility contracts with the USDA will receive $89 million with a limit of $40,000 per person.

Many will be tempted to use the payment to buy machinery. Hinman urges them to push a pencil; or, more appropriately these days, to fire up their office computer before deciding to buy equipment.

Farmers should ask themselves four questions when contemplating equipment purchases.

  • Is it needed?
  • Would used equipment or a less expensive model meet the need?
  • Is it profitable?
  • Will their cash flow support any future payments?

Hinman tells with obvious admiration of a farmer who gets the job done with three aging combines that have a total value of perhaps $30,000. A new, self-leveling hillside combine costs $280,000 or more.

The farmer that Hinman tells about needs two combines for harvest and keeps a third ready to go at the flip of a switch if one of the others breaks down.

Hinman will speak on the subject Jan. 11 at the Inland Empire Farm Forum in Spokane. Equipment dealers may not always appreciate Hinman’s cautious advice, but in the long run, it isn’t in a dealer’s best interest to sell equipment to a farmer who will have trouble paying for it.

WSU has a publication and two computer programs that will help farmers decide if they should buy equipment.

  • Finance: Analyzing Investments in Agricultural Capital Assets (MCP0012) is a software program with documentation for its installation and use. Finance analyzes the economic impact on a farm of investments in land, machinery, buildings and other assets.It costs $25.
  • KEEP/BUY/LEASE (MCP0023) This software compares the economics of keeping a machine versus buying or leasing a different machine. Cost is $15.
  • Pacific Northwest Farm Machinery Costs: 1997 (PNW0346) This 88-page publication helps farmers calculate fixed and variable machinery costs, depreciation, repair factors, service expectations, and other considerations. Cost is $5.25.

These programs and publications can be ordered from the WSU Cooperative Extension Bulletins Office in Pullman by calling 1-800-723-1763. There is a shipping fee and Washington residents must pay sales tax.

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