Wait and Pay Cash for a Center Pivot or Finance and Boost Yield Now?
While most everyone would love to have the cash to invest in improvements in their farm, it is not always available. So how do you determine the best places to use your cash as opposed to utilizing financing? Investing in irrigation can be a significant drain on cash, especially when you are just getting started and often incurring more infrastructure cost like wells. Because the impact on yield from timely water application can offset interest expense, utilizing financing for irrigation projects may be a better place to explore financing tools.
The following example is designed to demonstrate the difference between buying irrigation now and realizing improved yields next season compared to waiting for cash in hand to purchase 2 irrigation systems.
Assumptions:
There is an adequate existing well in place.
The irrigation systems are going to be bought as cash permits.
Corn is the primary crop (Mostly to simplify example)
Interest Expense is a 3.99% on a 5-year loan
Annual payments beginning 1 year from start.
The equipment cost will be the same purchased now or later.
Acres covered by the 2 pivots = 70.
Yield boost of 70 bushels per acre.
Corn price is $3.75 / bu.
#1 Pivot Price - $48,800, Ancillary Cost - $9,500
#2 Pivot Price - $50,100, Ancillary Cost - $11,100
Project Cost - $119,500
Pivot Operating Expense for Electric is $3 per acre inch.
Apply 8 inches per year.
70 Bu / Ac increase on 70 Ac @ $3.75 / Bu = $18,375
Deduct $24/ Ac (8” x $3) x 70 Ac for Electric = $1,680
Annual Gain: $18,375 - $1,680 = $16,695
Total Gain over 5 years: $16,695 x 5 = $83,475
Interest Expense Total for 5 Year Loan - $15,304
Net Gain: $83,475 - $15,304 = $68,171
Without the 70 bushel / acre increase, it will take longer to save the cash to purchase the irrigation systems. This example demonstrates the difference in increased revenues less the interest expense over a period of five years while waiting to accumulate the cash and purchase the equipment.
*Results will vary, this is an example for discussion purposes only, not a recommendation.
About the Author
Pete is the marketing manager for Michigan Valley Irrigation, having joined the company in 2016. He was raised on a dairy farm in western New York and graduated from Cornell University with a B.S. in agricultural economics. His entire working career of over 37 years has been involved in agriculture. A farmer helping farmers. When away from Michigan Valley he operates, Joyful Noise Farm, a small livestock and produce farm and spends time with his family.
