Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa. Following are the questions they are answering this month.
I’m thinking about getting rid of my 8-year-old combine. I need newer technology, but I don’t want to spend the money it takes to buy a new machine. There are some good deals on used combines that are just a couple years old. I’ve also been told I might be money ahead with a lease. What are your thoughts?
Miller: With the lower commodity prices, it becomes more difficult to justify spending money on newer equipment. If you are talking about “newer technology,” meaning better fuel efficiency or improved heads that capture more bushels per acre, you might have some extra income that offsets a portion of the cost of upgrading. However, be skeptical of the claims for enhanced benefits. I often tell my customers to analyze deals using half the projections the salesperson gave them. (If they tell you you’ll get 3 to 4 more bushels of soybeans per acre, see if it makes sense if you only get 2.)
If you are thinking of leasing a newer combine, remember that you will be trading in your equity in your old combine when you enter into the lease. Thus, you need to factor in the loss of net worth as part of the true cost of the lease.
Stout: Trading up a few years will get you most of the newer technology you are after, without the huge outlay of capital for a new machine. If you can find a low-hour machine 2 or 3 years old, you can save a substantial amount of money without sacrificing a lot. As far as leasing, if you typically keep a combine five years or more, in general it pays to purchase rather than lease.
Plastina: Think objectively about what drives your “need” for newer technology, because there lays a big part of the answer to your question. Are you facing high repair costs and losing valuable time during harvest? Are you facing price discounts when selling your crop for not being able to harvest at the right time due to the combine inefficiency? Or is it the case that your combine works just fine for the scale of your operation, but you suspect that a newer one will use less fuel, run faster, and harvest more bushels per acre? Finally, is your combine fully paid for? If you fully own the combine (or have substantial equity in it) and it works just fine for the scale of your operation, do you really want to use a part of your profits to operate a newer piece of equipment?
If harvesting efficiency is a problem, then I encourage you to use the Farm Machinery Financing Analyzer (Ag Decision Maker File A3-35) to evaluate three alternatives to acquire control of a new or used combine: purchase, lease with option to purchase, and lease rollover. Following an example, the spreadsheet allows you to enter the terms of the purchase and leasing agreements you are considering, and it calculates the annual cash flow, its present value and the annual financial cost for each alternative.
My son and I have 2,000 acres in production: corn and soybeans. We own half of the ground and cash-rent half. I don’t see commodity prices moving much higher in the next few years. I’ve heard organic is the only area with growing demand right now. I’ve also heard of some USDA-certified organic farmers getting as much as $8 for their corn and $19 a bushel for soybeans. Is it time to switch some acres to organic, and if so, what steps do we take?
Miller: How long do you think traditional commodity prices will be suppressed? You can’t just flip a switch and become an organic producer. You have to go a full three years without applying commercial pesticides or fertilizer. Many producers try to fill this time period by seeding the ground down and then taking hay off of it, which can take up to four years total if you have to use commercial fertilizer during the seeding year.
So, there is a cost to this conversion process. If you have livestock and a rotational cropping program, this transition may fit into your normal operation. However, if you are strictly a row crop producer, you may experience a drop in farm revenues beyond the drop that lower commodity prices are causing right now. That drop is not automatically “made up” when you become certified.
For example, some organic producers in our area have lower yields than they would experience with traditional cultivation due to higher weed pressure and inability to spray fungicides.
USDA does have some assistance programs to help producers become certified organic producers. Whether these programs will exist into the next farm bill is anyone’s guess. The link to USDA videos on the certification process is ams.usda.gov/reports/steps-certification.
Stout: To sell products as USDA certified organic, I believe you have to have a transition period where you grow according to organic standards for three years before they can be sold as certified. The farmers I know who are successful at organic farming generally have livestock in their operation to supply fertilizer in the form of manure. Also, they may have another crop, such as oats and clover or alfalfa, in their rotation to help break up the pest cycles that might be problematic in a corn-soybean rotation. The legume can also provide some of the nitrogen for the corn crop.
Do your homework, as there are a lot of regulations you have to follow to be certified and receive those great price premiums.
Zhang: While I agree with you on the stabilization of commodity prices for corn and soybean, you also need to think about both the risk and reward associated with possible organic transition. Production-wise, you will need three years of transition period with no pesticide and fertilizer application and new machinery.
Also, it’s important you know where and how to market your organic produce. Many times, successful organic growers have marketing contracts or have a farmers market avenue in nearby cities.
Without effective pesticides, organic production could also suffer from greater weed and pest pressure. This is the situation where you could possibly get the great price premiums if managed properly, but have arguably more risk in yield or profit loss because of bad weather, pest disease or ill-management. You could potentially get the price premium, but you have to do it right.
Talk with Craig Chase, the Iowa State University Extension and Outreach Local Foods Program manager. He can provide more targeted assistance, including explaining the certification process if you decide to switch some acres to organic.