Share Machinery, Reduce Costs — Developing a Joint Ownership Agreement

Share Machinery, Reduce Costs — Developing a Joint Ownership Agreement April 5, 2017

Original Article by Tim Lemmons, former Nebraska Extension Educator
Reviewed and revised by Nebraska Extension Educators Allan Vyhnalek and Jim Jansen, and Jay Parsons, associate professor in the Department of Agricultural Economics

Economic efficiency is paramount to profitability in crop production operations. Machinery and production equipment costs represent a major expense and one that has been on the rise in recent years. The Nebraska Farm Business Inc. calculates that in 2015, the cost of machinery on a per acre basis was 18% of the total cost of corn production. Proper management of these costs represents a key area where producers can effectively and efficiently reduce per acre costs of growing and harvesting crops.

Joint ownership of equipment can spread costs among multiple operators and reduce equipment costs for the individual operator. Successful joint ownership requires both a written agreement at the onset and ongoing good communication between the parties.

Machinery agreements can be structured in many ways; however, the most common include: 

  1. Sole ownership with a custom agreement - one party owns the machine, makes all payments including repairs, and makes an agreement with another producer for the use of the equipment, similar to renting equipment
  2. Joint ownership - each party in the agreement is responsible for a portion of all payments, including principle, interest, and cash expenditures
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The projected savings of sharing a combine could be $14.85/acre annually. In the example used in Table 1 for 840 acres harvested per year per producer, the savings would be $12,474.00.

Table 1. Comparison of sample combine costs with single and joint ownership.
DescriptionCombine with one ownerCombine with 2 owners
Value at purchase $285,000 $285,000
Length of service* 12 years 8 years
Acres per year/hours of use 840 acres/100 hours 1,680 acres/200 hours
Depreciation $23.95/acre $15.92/acre
Interest $ 9.78/acre $ 4.37/acre
Housing, insurance $ 5.09/acre $ 2.75/acre

*Assumption is that if the combine is owned by one owner, it would be kept longer than if owned jointly.  That is why the length of service is 8 years versus 12 years.

Advantages of Shared Machinery

There are a number of advantages to sharing machinery costs, including: 

  • Shared expense of high cost agricultural machinery
  • Efficient use of the machinery — equipment may be used over more acres annually than may have been possible in a single operation
  • Opportunity for shared labor, mechanical skills, and repair facilities
  • Opportunity to share technology like GPS auto guidance, grid yield data, etc.
  • Possible increased purchasing power in equipment selection due to combined financial resources
  • Opportunity for new and beginning farmers with fewer resources to partner with established producers to effectively manage risk exposure

Disadvantages of Shared Machinery

There are some disadvantages to joint ownership as well. They include:

  • Bottlenecks in production ― both owners need equipment at the same time
  • Cash flow needs of one owner may not coincide with the needs of another
  • Machinery down time may be detrimental to both owners, depending on field demand
  • Potential for death, bankruptcy, or unplanned retirement of one owner
  • Payment deficiency by one party requires another owner to pay more to keep equipment
  • Independence in ownership is lost ― decisions on machine disposal must be agreed to by all parties
  • One owner may be harder on machinery than another, or return equipment dirty or in disrepair

Starting the Joint-Ownership Process

Communication between all potential owners in a joint machinery venture is critical to success. They’ll need to complete a series of steps:

  1. Both parties must agree on the size and capability of the intended machine. If the shared item is too small, efficiency is lost due to production bottlenecks and the higher potential for breakdowns.
  2. Decisions must be made on brands, fuel types, and machine characteristics. This is an important step when considering the various creature comforts and technologies available on today's agricultural machinery.
  3. The machinery agreement must be completed.

The Machinery Agreement

This is the most critical aspect of shared ownership.  Following are just a few of the questions that must be answered when preparing the agreement. 

  • What determines who uses the equipment and at what time?
  • Is there a maximum number of acres or hours for each owner's use?
  • When controversy occurs regarding use priority, who or what standard will be used to make the final decision?
  • How will repair/fuel/lube costs be separated?
  • How will the machine or item be transported from one location to another?
  • What are the investment requirements of each party involved?
  • Will one party make the payment on behalf of the others or will each party make a separate payment?
  • How will use or availability of the equipment be determined?
  • What happens in the event of a bankruptcy, an unfavorable court ruling, retirement of an owner, or the untimely death of an operator?

Failure to address these questions in the written agreement may be disastrous. Do not assume that because you are entering into a relationship with a family member or a very good friend that a shared machinery agreement is not needed.

Summary

Joint ownership of agricultural equipment offers an opportunity to spread costs over multiple entities. Overall acquisition and annual maintenance costs are applied to an operation based on mutual agreement. This enables an entity the opportunity to capture both depreciation and operating expenses on the equipment, while lowering total cash outlays. Joint ownership also allows for larger equipment purchases, which may be required, depending on the net total acreage of the combined operations.

To be effective joint ownership of equipment requires a written agreement, good record keeping of expenses, and good communication. All parties must realize that they are partners in the investment. It's important that the equipment agreement be structured such that it addresses the issues and concerns identified in this guide and any others that may occur between all involved.