“We appreciate that most UK farmers still prefer to finance agricultural equipment through hire purchase agreements but usage-based finance products – including pay-per-use – are getting more attention. I am convinced this approach will become increasingly more attractive as time goes on.” muses Saul Jones, Managing Director of AGCO Finance. We are discussing ‘servitization’, something that has been common practice in several sectors for years (including automotive, materials handling and entertainment), and whether the UK agricultural industry is ready to embrace it. ‘Servitization’ is a term used to describe usage-based finance products, typically all-inclusive contract packages including equipment costs, service, maintenance, warranties and, occasionally, other costs.
Knowing that farmers will often take a longer view than other businesses when making investment decisions, Saul notes that the traditional hire purchase model suits this outlook. “There are, undeniably, plenty of advantages of purchasing kit via the traditional hire purchase model: most farmers can reclaim the VAT and often claim generous capital investment allowances allowing them to write off the purchase in a single tax year. They are investing in machinery that they will own at the end of the finance agreement and they often have equity remaining in that machine at that point. Service, maintenance and other ancillary costs are expensed separately.”
However, commercial challenges, unpredictable weather, rapidly developing technology and changes in the political and economic climate are encouraging some farmers to consider a different approach to machinery investment. Saul notes, “We see some farmers now focusing more on matching machinery cost to machinery usage whilst also looking at all-inclusive packages that pull together all elements of the equipment expenditure.”
Saul acknowledges that the term ‘servitization’ can sound a little trendy and ‘new wave’ and not particularly relevant to farming. However, he dispels this as a misconception: “In reality farmers have been working with all-in and usage-based rentals for generations; often via co-operatives. The name has changed but the underlying principle is the same.”
AGCO, as one of the leading players in the design, manufacture and distribution of agricultural equipment, operates a number of household-name brands including Massey Ferguson, Fendt, and Valtra. Its UK finance arm, AGCO Finance, is celebrating its 30th anniversary this year. One of its overriding principles is to work in partnership with customers, always looking for new ways to make the pound in the farmer’s pocket stretch further. This is not, as Saul explains, altruism but good business. “We have worked with farmers through the bad times as well as the good, and this usage-based approach is another way to give farmers the tools they need to budget and operate successfully in an uncertain market.”
Rapid advances in technology mean that some farmers look to upgrade solutions as they come onto the market - Telemetry and GPS tracking systems are good examples of this. “Technology investment is critical to many farmers but can be a significant cost to the business. Usage-based products can help lower the investment barrier. Some farmers are also looking for shorter-term finance agreements guaranteeing them access to the latest equipment.”
The approach is not new. Saul cites the example of farmers producing fruit and veg for supermarkets on one-year supermarket contracts. They will lease the equipment they need based on expected usage and then return it at the end of the period without having to worry about servicing, maintenance or depreciation. This allows them to lease the next-generation equipment for the next contract period.
Most farming operations have seasonal pinch points where a specialist piece of machinery is used intensively during that period and then, once the harvest, cultivation, or drilling is over, it sits idle until the next season. Seasonal payment structures, or usage-based payments, are well suited to these cases, allowing farmers to match off the costs against their income activity. As Saul says, “The old adage “buy what appreciates and lease what depreciates” still applies. Servitization-style financing means that that there is a lower investment barrier and payments can be factored over an agreed period with no surprises during the life of the contract as all the costs can be bundled in together.”
The increasing level of sophistication of agricultural machinery is such that remote servicing is standard on many machines reducing expensive downtime. Using a fault detection tool service, technicians can review the tractor’s performance data, identify the fault and, in many cases, repair the fault or cancel the fault code remotely. This type of remote service can be incorporated into a bundled finance package. This is invaluable during periods like harvesting, where farmers have only a short window in which to complete operations and cannot afford downtime. It means that they can concentrate on farming and not worry about dealing with equipment malfunction or breakdown.
Availability of skilled labour is another challenge facing many farmers. With the introduction of a new points-based immigration policy in the UK, recruiting agricultural labour from Europe and further afield is likely to become more difficult. Saul concludes, “This will further drive the need for mechanisation. Again, as with labour costs, farmers will be looking to match costs against activity and usage-based solutions make sense.”
In the company’s long experience of providing finance to the agricultural industry, AGCO Finance recognises that usage-based products are not likely to overtake the traditional hire purchase model any time soon. The more complex pay-per-use models are in the early stages of development. However, AGCO Finance is seeing a new generation of farmers adopting a fresh approach to purchasing decisions and are open to exploring different ways of investing in equipment and services. As Saul explains, “The ownership approach to funding machinery is not going to disappear overnight. Many UK farmers look to own the equipment that they invest in. But a slow shift towards more usage ‘all-in-cost’ payment is starting”.
Some industries are taking the concept of servitization several steps further: in the hospitality and leisure sector, one vending machine company is taking the idea of usage payment to its logical conclusion whereby no one in the supply chain is paid anything until a product is purchased from the machine. To translate that approach into something that works for the agricultural industry is too far in the future to contemplate for now, but the basic idea of adopting a usage-based, all-in-one approach is showing signs of healthy germination.