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Wanna-be farmer offered a ‘free equipment use’ deal

Silhoette of a farmer maintaining farm equipment
WORKING TOWARD A FARMING CAREER: Every opportunity to start farming must be carefully thought out beforehand.
Profit Planner: Panel tackles pros and cons of ‘free equipment use’ offer to an employee who wants to start farming.

Q: I work for a fertilizer dealer who also farms. He’ll let me use his equipment for free to get started farming if I can find land to rent. Can I afford to bid more on land since I won’t have to pay equipment charges?

A: Mike Evanish: No simple answer
On the surface, this looks like a great opportunity. But as with everything in business, the devil is in the details.

Just what did he mean when he said “use my equipment for free”? What about damage to it while you’re using it or repairs due to normal wear and tear? And how is insurance going to work?

I’m sure he isn’t interested in carrying your collision and liability insurance. Your situation is unique. In the insurance business, unique usually costs more.

For all these reasons and more, I urge a written agreement spelling out all responsibilities with the equipment. Once the equipment contract’s in place, work on your budget. What would you plant? What would be your yield and price expectations? What’ll your costs be?

Without a track record, obtaining financing will be hard. But going to the bank with a solid budget in hand will help. That budget will also answer your question about what you can afford to pay for land rent.

A: Dale Johnson: A long-term deal?
I assume your boss’s generous offer and his motives are genuine in trying to help you get started. Equipment costs are a major drain on a farm operation. Buying new equipment exacerbates cash flow and debt problems. Buying used equipment runs up your repair costs.

Forgoing equipment costs may seem to justify a higher land rental bid. But try to ascertain how long your boss’s offer is good for. I believe it’s short-termed.

Your boss wants to help you get started. But you’ll soon have to assume those equipment costs. So even though you might justify a higher initial rental bid, it won’t work economically in the long term. And trying to negotiate a reduced land rental rate in the future is difficult.

Base your rental bid on budgets including equipment costs.

A: George Mueller: It won’t be free!
Your boss must have a lot of faith in you. It’ll save you a lot of startup costs. But parts wearing out have to be replaced. Minor repairs and major breakdowns will be your responsibility. Fuel and lubricant costs will be yours, too.

Renting land is a ticklish prospect. We farmers are rather quiet about our arrangements with our landlords and landladies. We value them as part of our team. Some farmers keep them informed with a newsletter. Some do extra favors for them like plowing their driveways.

We know it’s cheaper to rent land than own it. So, we’re very protective of our landlord/farmer relationships. We pay different rates depending on the land quality, nearness to home base and competing area pressures.

You’ll probably have to pay a slightly higher than average price to free up some land. Mention everywhere you can that you’re interested in renting land to start farming. Perhaps an ad in the local PennySaver will shake some land free. But before you take rented land from a fellow farmer, be sure that farmer is notified and given a chance to match your offer.

A: Glenn Rogers: Look longer term
Chances are, this arrangement would work in the short run. But what about the long run? (See “7 things to think on” below.)

Once you consider what my colleagues have suggested, have a long, detailed discussion with your employer. Move as quickly as possible toward making things as equitable as possible for the employer and you. Write down all advantages and disadvantages of rental arrangements. Then start looking for land.

Land rents are high, but can be negotiated and will fluctuate over time. I don't recommend paying too much for rent. But that’s not the biggest factor you need to consider. Crunch the numbers, talk with other experts and write up a contract before moving into the arrangement.


7 things to think on

While the answer may appear to be "yes" for being able to bid higher rental rates, Glenn Rogers shares seven other concerns to think on:

1. Rent payments aren’t the biggest crop investment. Tillage, seed, planting, pesticides, risk, cutting, transportation and storage costs greatly exceed rental payment values.

2. Employment arrangements can change very quickly. Think carefully about binding yourself to an equipment arrangement tied to employment that’s owned by the employer. It is two arrangements/contracts that aren’t necessarily compatible. You could well end up with another job, but tied into long rental agreements — without use of the equipment.

3. How do you and your employer value the equipment use? It's a rental arrangement that should be accounted for, written down and valued. Otherwise, it could easily get out of hand.

4. Equipment tends to break at the most inconvenient time, especially when its borrowed. If it breaks when it’s rented, no problem. But who pays for the breaks and down time when it’s borrowed?

5. When is the equipment available? How far is it from the farm you plan to rent?

6. Don't let the farming and equipment interfere with the “day job” that pays your bills. That could change in the future — but not yet.

7. Your employer could also retire, find a new opportunity or change his priorities. Or, unforeseen circumstances could come upon the business — changing everything.


Got a question? Our experts await!

Our Profit Planner panel would like to hear your question. The panel consists of Michael Evanish, farm business consultant and business services manager of Pennsylvania Farm Bureau’s Members’ Service Corp.; Dale Johnson, Extension farm management specialist at University of Maryland; George Mueller, dairy farmer from Clifton Springs, N.Y.; and Glenn Rogers, University of Vermont Extension professor emeritus and ag consultant.

Send your questions to Profit Planners, American Agriculturist, 5227B Baltimore Pike, Littlestown, PA 17340. Or email them to [email protected]. All are submitted to our panel without identification.

TAGS: Management
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