For years, tractors have depreciated at 10% per year. This was more or less predictable and reliable, with some minor inconsistencies, until 2021. Now, tractors are appreciating value at 27%. That number is more than a minor inconsistency, and it isn’t stopping in 2021. In 2022, the yield demand is as high as ever, but so are operating costs. The supply? It is dwindling. While some of this is caused by the supply chain issues everyone is experiencing, there may be something else going on here.
Under US Tax Code Section 179, farmers are allowed to deduct farm equipment costs. This sounds like it would work well for farmers, and it does, for the big ones. Farmers with larger operations have the cash flow to purchase equipment no matter the cost, or they have the banks backing them up with the necessary loans to do so. Profits were higher for farmers in 2021. They purchased seed and fertilizer well before inflation began to affect the prices, and the weather cooperated, making it a great yield year. These farmers, especially the bigger ones, are able to use those profits to buy overpriced equipment, for which they know they’ll get a break come tax season.
Smaller or newer farmers do not have cash flow or bank loans, making it difficult to find equipment to grow their business. While they attend auctions in hopes of finding a suitable piece of machinery, even used machinery is surging at sometimes 30% more than the new cost. Combine this with the supply chain issues, and smaller operations don’t have a chance.
Supply Chain Issues
Prior to 2020, or even 2021, few people used the phrase “supply chain” in their regular vernacular, but now everyone from your 8-year-old wanting a gaming system to your grandma needing a certain baking ingredient knows about the supply chain. While gaming systems and baking ingredients are frivolous, steel and computer chips needed for farm machinery are not. The demand for these is higher, but due to both the supply chain and the labor crisis, the manufacturing of these materials is slower than ever.
Popular machinery auctions are completely sold out one day, and need to supply another 100+ pieces of equipment for their next auction, which is still possible, but it is becoming more and more difficult. Right now, tractor models are being purchased with the knowledge that they will not be suitable to take off the lot for months, maybe even a year due to these issues. Farmers are purchasing them anyway. This may come back to the tax code. They want to get the deduction, and they know they will get the equipment eventually. Although this may seem like the best of both worlds, it is only driving the demand, and the dollar, higher and higher.
Projections for 2023
Unfortunately, the increase in new and used equipment costs is not limited to 2022. With the market being so high, for example, corn prices are up 75% since last year, more people want to turn to farming to make money. The problem with this, besides it driving the demand for equipment up, is that these people are not going to be ready for the market to slow. While experts see no signs of that happening in the near future, it will happen eventually. Farmers prepared for this downturn will survive, but unprepared farmers, or even unlucky farmers, will not.
In the age of every-man-for-himself, it is time to consider how our actions and purchases affect the next person, the little man, the new man. Before making a capital investment, consider the impact on both your own farm and the businesses of others.
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