What to Know About Farm Equipment Loans
Amid rising prices, farmers are relying more on farm equipment financing to keep their machinery up to date.
Since the onset of the global pandemic, the farm equipment market has constricted and caused major roadblocks for U.S. farmers and ranchers. Due in part to skyrocketing demand for both new and used farm equipment, prices have increased while supply has been hampered.
Impacts of Farm Machinery Shortages on Farmers
According to Purdue University’s May 2022 Ag Economy Barometer report, over 40 percent of producers are feeling the impacts of farm machinery shortages this year. In addition to finding equipment, 27 percent of producers are struggling to obtain parts for repairs. Having reliable and well-maintained farm equipment is essential for the success of daily farm operations and is mission-critical during the harvest season. Even when farmers are able to place an order for equipment, they are often facing extended waiting periods that can place a strain on production.
Why Is Farm Equipment Difficult to Procure?
Like most issues farmers are currently grappling with, the farm equipment shortage did not occur overnight. It has built up as a result of various factors working together to create the market we are now experiencing.
Factors contributing to the farm equipment shortage include:
- Past overselling of used machinery;
- Inflated demand; and
- Shortages of essential raw materials, parts, and digital components
Overselling of Used Machinery
Around 2013, demand for new equipment declined as a result of lower commodity prices, so less new equipment was produced. There was an abundance of used equipment traded in, so dealers offered this to farmers at low prices. This further decreased sales and production of new equipment, placing a greater strain on used equipment and setting the stage for the coming events.
Inflated Demand
When commodity prices rose in 2020, demand for equipment skyrocketed by more than 25 percent. From early 2021 to May 2021, tractor sales increased by 26 percent. Following the basic laws of economics, supply decreased while prices increased. For instance, utility tractor prices saw an 18 percent increase from 2020 to 2021. Further complicating things, increases in demand for other technologies outside of the agriculture industry reduced the supply of parts like computer chips and steel.
Shortages of Essential Inputs
Another contributor to the farm machinery shortage is a shortage of inputs necessary to manufacture this equipment. Inputs that are experiencing supply chain shortages include:
- Iron;
- Steel;
- Semiconductors;
- Transportation; and
- Labor.
Overall, these contributing factors all combined to create the perfect storm.
Understanding Real Estate Farm Equipment Loans
Agriculture farm equipment loans backed by land equity can help alleviate the financial stress of paying cash when buying farm machinery, but it’s important to understand when and how they should be used responsibly to avoid overleveraging yourself.
Before purchasing equipment, you should conduct a cost-benefit analysis and consider the following factors to ensure it is the best choice for your operation:
- Annual ownership costs and operation costs
- Cost and availability of renting or leasing equipment
- Opportunity cost of using capital that could be allocated elsewhere
When purchasing farm equipment, it’s important to secure financing with your best interests in mind. Oftentimes, farmers will take out loans at the dealership. Land lenders like AgAmerica could be a good option for borrowers seeking a different option. However, when considering taking out a farm equipment loan backed by the value of your land, it is important to make sure terms do not extend past the economic life of your farm equipment. Because the economic life of farm equipment is typically seven to 10 years, securing a short-term loan is usually the best route.
Another important consideration is ensuring that the consolidation of your farm equipment loan has favorable terms to prevent overleverage. Consolidating multiple equipment loans into an interest-only loan can be an effective way of simplifying debt payments and increasing immediate liquidity. However, this loan structure often serves as a temporary solution to boost operating capital and should be re-evaluated once a healthier farm cash flow is in place.
AgAmerica Prioritizes Your Operation’s Financial Health—No Matter What
With rising farm equipment prices and shortages, it’s important to equip yourself with flexible financing capable of adapting to your evolving needs. As an industry advocate, AgAmerica always places the interests of farmers first. Our mission is to support the long-term success of farmers, ranchers, and landowners across the nation, whether that’s providing financing, counsel, or both. We are committed to improving your operation’s financial well-being and sticking by your side through the good times and the challenging ones.
Analyze your operation’s financial health with AgAmerica’s informative Financial Health Check tool.
