By Tristan Watkins, CEO, BNP Paribas Leasing Solutions UK
In 2015, total year-on-year income in the agricultural industry was down 24%. There’s a real need to make up this financial ground, and the current economic environment won’t make this easy. Price and supply volatility are endemic problems for the industry at the best of times, and the fickle nature of weather patterns lends considerable uncertainty to even the most robust farming operations.
So what can those in the industry do to bridge the gap and boost their profits?
Sharing is erring
A good starting point is to rethink the way they invest in specialised equipment. Agricultural machinery is both highly expensive and highly necessary to a farm’s continued operation. What’s more, new technologies such as telematics are creating efficiencies where they didn’t exist before. Some of these innovations may peter out, but others will be adopted by the wider industry – and it’s always better to get ahead of a trend than to lag behind.
But buying this equipment and investing in the technology outright can be difficult when budgets are strained, profits aren’t expected until harvest season, and the tools will only be used for part of the year. Facilitated by platforms like Uber and AirBnb, the rise of the “sharing economy” – where goods and services are shared by people and organisations – could present a viable alternative for the agriculture industry. MachineryLink Sharing, an online platform, has attempted to bring this model to the US market; the basic idea being that farmers can rent out tractors, combine harvesters, and other equipment they aren’t using to other farmers during relevant seasons.
The idea is an interesting one, and deserves credit for its use of technology, its attempt to address a real industry need, and its efforts to provide an alternative to conventional purchasing models. But there are questions to be raised about the viability of renting out expensive machinery to strangers: if it’s returned in poor condition or not at all, the farmer will be out of pocket and under more strain than they were before.
The question of the sharing economy is fundamentally however a reframed version of the question of whether a farmer should buy or lease equipment. And though the context is different, the dilemma is the same. Farmers want to be able to upgrade to the latest equipment, they want maintenance incorporated into the price, and they want to be able to scale their machinery up if necessary.
A leasing agreement can resolve these concerns, but with concrete terms and assurances. These agreements require regular payments instead of upfront investment, can be designed to cover the farmer’s long-term harvest cycles, and can incorporate setup, maintenance, and ongoing support into the monthly price. At the end of the contract, the farmer can upgrade to a better machine, and take advantage of the efficiency gains associated with new technology.
In a time of diminishing profits, budgetary flexibility – in whatever form it takes – is increasingly important. When farmers find ways to reduce their expenditure, they also find ways to boost their profits. Investing in new equipment may seem like a counterintuitive way to mitigate costs, but with the right finance arrangement, it can limit waste, increase freedom, and coax more money from a limited budget.
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