Editor’s Note: With commodity prices experiencing a prolonged downturn, farmers have limited cash to spend on their operations such as purchasing new machinery and equipment. But there is plenty of opportunity for them to address their needs throughout the year through the leasing or subscription economy, argues Tristan Watkins, CEO of BNP Paribas Leasing Solutions, the European asset finance, leasing and rental solutions provider.
Many of us don’t own our phones and cars; we lease them. Each month we pay a subscription fee and in return have access to the asset for an agreed period of time. This makes sense; given the high-speed of technological turnover, outright ownership often buys us a product that will become outdated or ineffectual before we realize a return on investment.
While in the commercial vehicle industry, for example, this is becoming common practice – with more leased vehicles currently on the road than bought – the business of farming has traditionally favored a frugal, cash-is-king approach that pays per product. However, market pressures are challenging farmers to find (and fund) a competitive advantage, pushing them to consider other payment options available to them in today’s ‘subscription economy.’
Farming is seasonal, and machines are expensive. In America, leasing initiatives such as AgTribe, Machinery Link, and HarvestPort are helping farmers reduce costs by connecting equipment not in use, with farms in need of machines. This way, a harvester that costs hundreds of thousands of dollars, but sits idle for most months, can be rented out to farms in different states and put to work all year round.
Factors such as equipment replacement cycles, fuel efficiency, and seasonal fluctuations, have a costly impact on farming budgets and forecasts. Asset finance is an increasingly popular payment option as it can provide farmers with the means to obtain the equipment they need without having to buy the machinery outright.
Farm machinery operates in a tough and testing outdoor environment. The practice of regularly replacing equipment due to wear and tear, or to keep up with the latest technological developments, is an expensive business that farmers would no doubt prefer to avoid.
Leasing frees them from the expense of buying and selling equipment on a regular basis: they’ll be able to upgrade at little or no cost as more sophisticated models come on the market.
Strict standards require all farm machines to be more fuel efficient, using less energy and emitting fewer dangerous pollutants. This advanced equipment costs more to develop, which in turn makes the cost of purchase greater for the end user. As regulatory attention becomes more focused on protecting the environment from harmful emissions and wasteful fuel consumption, compliance will become increasingly costly for farmers. Asset finance allows them to stretch their budget further to adapt to these changing circumstances.
A farm works according to the seasons, but not all seasons yield an income. If a farm is largely crop-based, for example, chances are it makes most of its profit at harvest time. Many asset finance companies understand this problem and will provide farmers with a flexible payment option that accommodates the fluctuation in income. As a result, monthly payments can be adjusted to match cash-flow, enabling them to spread their budget over the year.
The different seasons also necessitate different machinery: again, few crop farms will use a harvester in spring. Subscription-based models allow farmers to lease the equipment they need when they need it.
Sharing in the subscription economy
Subscription-based finance is a trend that all key stakeholders in the agriculture industry would do well to be aware of – from farmers and agricultural suppliers to growing agtech companies and their investors. However, there is more than one way for those operating in farming and agricultural production to get the equipment they need, and they must ensure they always get advice from their accountant before making key decisions.
Most asset finance solutions are long-term commitments of around 4 to 5 years. Accountants will be able to assess a farm’s business needs against the terms of the agreement and determine whether or not it is flexible enough.
Choosing to do things differently is not an overnight decision. Farmers must work with a trusted, neutral advisor to assess the suitability of all available options. It’s important to understand the benefits and costs attached to any finance plan and match the right payment option to the right product, and ultimately do what is best for the farm in an increasingly competitive world.
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