Falling income and incentivized deals spark US farm leasing boom

Writing in Farm and Dairy, Kristy Seachrist says: “With lower income levels, farmers are scaling back spending. The St. Louis Federal Reserve’s Q3 2015 agricultural survey found values for the index for household spending and the index for capital equipment expenditures falling to their lowest levels since the survey began in 2012. And the forecast shows that spending in both categories is expected to fall again in the fourth quarter.”

Doug Loudenslager, Evolution Ag, said his dealerships have seen more interest in leasing in 2015 compared to just two years ago. He attributes the increase in popularity to the depreciation and Rule 179 in the US tax code.

“Congress has failed to take action on the depreciation rules, so it’s hard for them to make a decision when it comes to purchase or leasing,” he said.

Loudenslager said farms and businesses have to figure out what impact a purchase will have on taxes, and they can’t wait until December to do it.

He said the same situation happened last year, and Congress decided at the last minute to renew tax incentives.

Loudenslager isn’t alone in connecting the increase in leasing to the current tax situation. Amy Weum, with Farm Credit Service’s Ag Direct program, the leasing arm of the bank, said tax laws and uncertainty in the markets are pushing farmers to lease.

“Leasing gives them a tax write-off. It’s that simple,” said Weum.

She added that the combination of the loss of bonus depreciation and Section 179 in the tax code means farmers can take fewer deductions. Last year, they were able to deduct up to half a million dollars, and unless Congress takes drastic action, farmers will only be able to deduct $25,000 this year for a piece of equipment.

This means that farmers can gain more by leasing equipment, such as Combines, because the entire amount of the lease payment each month can be deducted from their income taxes because it is considered an operating cost.

Weum said there are many options available for leasing. Farmers can choose a true tax lease, which is when farmers deduct the monthly lease payment from their taxes instead of standard appreciation. Or producers may choose a shorter lease and take a higher payment, which ends up reducing the amount of taxable income.

Another option is a lease that can be structured to have lower payments but have a higher residual at the end. Some farmers are choosing to have a 50% residual at the end, which is similar to a loan with a balloon payment at the end. Or the farmers can choose to pay off the piece of equipment or lease another piece of equipment.

Weum added that the leasing option is growing in popularity because many farmers are breaking down input costs to the acre and so they feel they should break down the machinery cost to the acre.

By leasing, producers are also able to keep more cash available for leasing land instead of owning equipment.

For producers, it also allows them to rotate equipment easier and decreases down time when they need to be in the fields. Dealers and manufacturers are also reaping benefits from leasing because it means assembly lines are moving and equipment is still moving.

New vs used

Greg Peterson, used equipment value expert and founder of Machinery Pete, confirmed that the late model farm equipment market has softened in the past 12 months which he attributes to the increase in equipment leasing.

“It’s evident by the amount of used equipment on lots,” Peterson said.

Peterson said the market may get better because the glut is going to force dealers to become more aggressive when it comes to selling equipment.

He added that glut of equipment is not a new problem, it’s just a growing concern. “We can just hope that the ag economy will get better,” he added.

He said dealers have had a problem with Combines for the past five years because many producers started jumping to leasing when commodity prices fell in 2013.

Getting used to technology

Peterson said farmers love being under warranty on new equipment, especially due to the computers involved on the machines.

He added that farmers are getting used to technology and they want the newest technology available on their machinery. In addition, producers are under more profit pressure, which means they want to keep the latest equipment in operation.

An added benefit is that if farmers decide to purchase the tractor at the end of a lease, they can benefit in the end. Peterson said many producers realize in five years they will have a tractor with low hours, which will become valuable on the used equipment market.

Although one concern is when, and if, manufacturers will eventually have to change leasing terms or stop offering them at all if the used equipment is not sold over time.

What’s hot

The influx of used equipment doesn’t always equal low equipment prices.

Peterson said 20-year-old tractors are not only bringing high prices because of the simple mechanics, but also because many farmers have a history with a tractor or piece of equipment and know how to handle it.

A 1990 Case IH 7120 with 1,570 hours and like-new condition recently sold in east central Michigan for $69,000, which is the highest Peterson ever saw one sell for at auction.

He said farmers are looking for equipment that will keep them moving, but they also consider what new equipment is selling for.

“Farmers at auctions always can be heard saying, ‘but what does a new one cost?’” Peterson concluded.