They're common on stereos and cars. Now, interest is growing for big-ticket farm equipment coverage.
Before a wheel is turned this fall, it's assumed that risk is part of the crop production game. But have you considered managing the downside risk of that wheel not turning when you want it to?
As farming becomes more focused on the bottom line, managing the business side of tractor and combine operations has taken on a larger role. One way to manage that risk is to look at purchasing extended warranties.
“Extended warranties are like an insurance program for us,” says Pat Duncanson, who farms with his brother Karl and their wives near Mapleton, MN. “To me, that's a big key in our operation. Your cost of ownership can skyrocket when you start running into major repair expenses.”
Duncanson says they have purchased a number of warranties from equipment manufacturers. This summer, he purchased a John Deere 8410T and extended the warranty to five years, 5,000 hours, which cost just under $3,500. The standard factory warranty on that particular tractor is two years, 2,000 hours.
Describing their operation as “heavy users” of their key tractors, Duncanson says they tend to hold their equipment and not trade every year, which impacts their decisions on the warranty options. “It depends on how much you plan to use the equipment,” he says. “But if you get out, use it and push it pretty hard, which we tend to do, for us it's beneficial.”
Besides added insurance, Moe Russell, president of Russell Consulting Group, Panora, IA, says buying an extended warranty from major equipment manufacturers can be looked at as a hedging option.
“Basically, you're paying for identified costs up front and it's a way to hedge against inflation in parts and labor costs,” he says. “Without a warranty, you're at the mercy of paying whatever price the market will bear for repairs at the time of breakdown.”
When you consider the greater financial picture in the risk management analysis, Russell says an extended warranty can also be viewed similarly to crop insurance. “If you can't afford losing a crop, you typically purchase crop insurance. The same applies to equipment management,” he says. “If your balance sheet is heavily leveraged, and substantial repair costs would be a significant blow to your operation, it's a sound business decision to add an extended warranty.”
As farm size and acres covered continue to expand, warranty programs gain merit, says Kansas State economist Terry Kastens. “When you look to the benefits of expansion, you want to leverage yourself as effectively as you can to take advantage of lower costs that come with economies of scale.
“However, it adds risk,” Kastens notes. “If you're a growing, successful farmer, you tend to stay leveraged while you're growing. As farmers have an aggressive growth strategy, with new and bigger equipment, in theory it's best to protect your collateral for both you and your lender.”
A good first step to looking at the value of an extended warranty is thinking about your own typical use, says Bill Campbell, ag engineer at South Dakota State University. “If you have schedules of what type of work has been done on your equipment — and your maintenance routine — it helps in looking at whether a warranty will pay for itself,” he says. “And by analyzing your own use patterns, it helps determine whether you want to take the risk.”
If those use patterns result in significant downtime during peak periods, the meter is running. “What's your time worth?” says Rae Kurth, ag sales manager for Ziegler, Inc., a Caterpillar dealership in Bloomington, MN. “It's a tough one to measure, but I've seen estimates where the cost of downtime during planting can be $450 per hour,” adds Kurth. “At the dealership level, we like to offer extended warranties that tie-in preventative maintenance programs. Timely servicing, oil sampling and inspections can prevent untimely breakdowns and extend power-train life.”
From a trends standpoint, the growth and utilization of extended warranties has steadily evolved at John Deere, says Mike Viaene, service administrator for Deere's warranty claims division. “We've offered various forms of extended warranties on equipment since the early '90s,” he says. “But the proliferation of machines those programs are offered on has grown as interest has grown.”
Viaene adds that Deere dealerships are seeing a general growth pattern in customers' willingness to learn more about extended warranty programs and consider them as an option. “Customers will look at them and weigh the value of the benefits vs. the cost. It's a business management decision that provides protection in case of a larger failure further down the line.”
Duncanson realizes warranty programs are not for everybody and measures the value of each on a case-by-case basis when deciding whether to purchase one for a piece of equipment.
But when he purchased a new tractor this summer, he felt it was worth the added investment for their operation. “As expensive and complicated as equipment has become, a key component can cost $10,000-20,000 in repairs,” he says. “We can definitely justify the warranty cost as part of our risk management plan and it gives us peace of mind.”
Editors note: Warranty coverages, costs and terms vary depending upon the equipment and the manufacturer. In addition, most equipment companies will allow customers to purchase an extended program anytime between the purchase and the end of the original warranty. Contact your local dealer for more information.