Choosing Leasing Or Ownership Depends On Your Cash Flow And Goals
Leasing versus financing can look like a simple math problem until you’re the one trying to protect working capital, keep payments aligned with harvest income, and still upgrade equipment when technology changes overnight. We sit down with Logan Dowdy, Chief Credit Officer at River Valley AgCredit, to lay out the practical differences between a farm equipment loan and an agricultural lease, without the fluff and without pretending there’s a one size fits all answer.
We talk through what “ownership” really means for your operation, then get specific on the big questions producers ask us every year: How do lease payments work? What is a residual value and why does it matter? Why are many leases due at signing when a traditional annual payment might not be due for a year? Logan also explains technology obsolescence in modern agriculture and why certain machines, like sprayers and spreaders packed with precision ag hardware, are often better candidates for leasing when you want flexibility and frequent upgrades.
Taxes are a major part of the decision, so we dig into the basics of lease payment deductions, depreciation on owned equipment, and why you should always loop in your CPA before you choose a structure. We also cover purchase back leases, what a “dollar lease” is, and why it can behave more like a loan than people expect. Finally, we zoom out to the current environment, including higher interest rates, strong yield potential, grain market carry, and the importance of rebuilding working capital and locking in profit early so you can plan with confidence.
If you’re weighing farm equipment leasing, equipment financing, or a mix of both, hit play and then tell us what you’re wrestling with this season. Subscribe, share the episode with a farming friend, and leave a review with what you want to hear next.
Transcript
Welcome to Back to Your Roots, a podcast that provides insight into all things farming, financing, and farm life, guiding you back to your roots. Thanks for joining us today on Back to Your Roots. I'm your host, Chris Griffin, and today we are pleased to have Logan Dowdy, our Chief Credit Officer here at River Valley AgCredit. How long have you been here, Logan?
Well, it's a little over 10 years.
Okay. I've been here for 4 and you were a credit admin before. This is your very first year as you got promoted to Chief Credit Officer. And, uh, and so congratulations on that. And it's, I know it's, I know it's been a learning curve this year and been all, but we've, we've managed and moving right along. So, uh, let's jump right in and first discuss a few things. I know we brought you on. We kind of wanna talk a little bit about, uh, your thoughts on leasing versus financing. And I know that gets brought up a lot with our farmers and when they're looking at their plan for the year and what they need to do, what might maybe fit their operations?
Yeah, absolutely. You know, looking at this thing from a high level, when you think of financing, that means you're purchasing an asset and building ownership over time. Now, the borrower takes out a loan, you know, they make the principal and interest payments, and ultimately, you know, they own that asset once that loan is completed. Now, when we go to the side of leasing, it's completely different. You see, leasing is where we basically, a company purchased the asset for you and the producer pays to utilize that asset. And over a little period of time, you know, they pay down, they gain some equity within that, but you have a residual amount at the end of that where you eventually can either buy that out, turn it in, or whatever fits your operation the best.
So I know a lot of times, like, I don't, I don't nearly see it as much, I guess, just in, in where I am, but You know, what operations do you feel like would best benefit from leasing typically and those types of things?
Yeah, that it's very important that you meet with your tax advisor because a lease is dependent on your taxable situation because every lease payment that you make is a write-off.
It's a direct operating line expense. So you can write that amount off in full, whereas when you're doing a loan, you can only count off the interest that you pay. So not having that ownership of that asset, you get the benefit of the principal and interest portion, whereas having ownership of it, you only get the interest portion.
Now, what about as far as depreciation goes on your taxes? You know, I know you see that a lot of times, especially, you know, when they're trying to, trying to owe Uncle Sam, try to keep as much from them and depreciate their, their purchased owned assets.
So your depreciation doesn't come into effect with a leased asset on a true lease.
Okay.
Now we could talk about a dollar lease, but that's a whole different animal. But you don't get to claim that depreciation. But like I said, you get to claim the principal and interest portion of each one of those lease payments that you make.
So how does a farmer know if leasing or owning is the best option for them and their operation?
You know, it's not a one-size-fits-all answer in this situation. The decision really comes down to the producer's goals and financial situation.
If a farmer intends to keep an asset for a long period of time and wants to build equity in it, ownership may make sense in that situation. However, if they prefer to preserve working capital, maintain flexibility, or regularly update equipment, leasing might be the better fit in that situation. Typically, you know, we're looking at several factors including cash flow, expected length of use, tax considerations, technology obsolescence, depreciation, and all other overall financial positions of the operation.
Okay. Get to that end.
So, you know, I know when you're talking about, you said technology obsolescence, will you go into that a little bit and explain that to the listeners? Sure.
So every year a manufacturer's coming out with a new something, a new widget that goes on a tractor, a combine, a planter. sprayer. And, you know, field computers, which is what's in our combines and sprayers, they control every aspect these days of your plant, whether it be in your GPS to application rates, everything. Well, just like your computer at home, there's updates that comes out. And there's different, you know, processing chips and different functionality that comes along with that. And that's an ever-changing thing, you know, in today's agricultural society, you know, that's— Technology is what helps us get things out quicker and gets them back in quicker.
Well, and it's probably changing so quick now, you know, technology from year to year that, like you said, a lease may be a better option if somebody's wanting to stay up to snuff every year on that. If that's not as big of a deal, then, and they're wanting to gain, you know, maybe a purchase is a better fit for them, then that's a better option.
And then they just, you know, upgrade when they need it.
Absolutely. You'll see a lot of producers They will, they'll do leases on sprayers a lot, sprayers and spreaders, because you have so much variable rate technology and prescription maps that you're using, and that stuff can become obsolete pretty quick. And so it, it makes more sense on some items like that.
I know a lot of times people don't really understand how like a lease payment structure is going to work and when you go to trade it in and things like that.
So can you explain a little bit as far as the payments, the flexibility, and then just kind of the end residual on going with a lease.
Yeah, absolutely. So as I said before, one of the biggest advantages of leasing is the flexibility. A lease payment can be absolutely customized to fit that producer's operating cycle and their cash flow needs. Example here, many agricultural leases can be structured with annual, semiannual, or even seasonal payment schedules that align with harvest and marketing periods. At the end of the lease term, there's always a residual. You heard me mention that earlier, and that is the estimated value of the asset that remains at the lease maturity. The residual usually helps determine the payment amount throughout the term. So larger residual, less the payment. Smaller the residual, the bigger that payment's gonna be.
Okay.
And a lot of people don't realize You know, whereas when you finance something, that first payment's usually due, if it's an annual pay loan, it's due a year out. But lease payments are due at signing out of the gate. So that's something to remember.
Now, are they typically, um, like a lease, is it gonna be like a monthly lease payment?
So no, it, it can be, yet again, it's flexible. Monthly, semiannual, quarterly, annual, whatever fits the needs of the borrower.
Okay. And this was something too, I mean, as far as purchase-back leases, purchases of equipment can be reimbursed back and converted to a lease. Can you kind of explain that?
Absolutely. This is something very, very unique to the Farm Credit System and a product that we have. And, you know, this is not really heard about in the leasing industry much. But basically, a producer can go out, buy themselves a piece of equipment, and they initially decided, well, I'm going to finance that or whatever. And quickly, they're like, man, maybe we need to look at a leasing option. Or they have a CPA that says, you know, you would've been better off leasing this to get that benefit. So what, in that scenario, the leasing company purchases the equipment from the producer.
Okay.
And then just flips it back over and turns it into a lease.
Really? So what's the benefit when they're doing that? What's the benefit to the, the borrower or the customer?
Well, the benefit is that, that more, more than likely comes down to whether you make the decision after speaking with your CPA, if you're better off having that leased asset, the lease payment to write off, or if it's something that you need to own at the end of the day, is just providing that flexibility. And, you know, personally, I've, I've done a few of those purchase back leases when I was a loan officer, and it just, it helped position an individual where, you know, he had plenty of Section 179 depreciation out of the gate for the year. So it didn't make sense. He went and bought all this equipment. He's like, well, I've gotta depreciate it within this year, or, you know, or I could just do these leases and use those payments as a write-off.
I gotcha.
So it just, it's what fit, generally it's what fits their financial position best.
Well, speaking of tax benefits, and you kind of talked about it in the very, out the gate, but, you know, as far as tax benefits of leases and then lease payments, you know, are made on traditional leases, qualifies tax deductions themselves.
That's right. So I, as I said, every single payment that you make, you can write off as an operating expense. And to dig into that a little bit more. And from the way we look at it from a credit perspective, and there's a little bit of 2 fields or schools of thought in this. Some financial institutions or CPAs or what have you, they will show a leased asset as an asset on the balance sheet. However, the way for the most part the Farm Credit System views that is a leased asset is not an asset.
Technically, they don't, they don't own it.
They don't own it. You're, you're just, you're leasing it. You're rent— that'd be like saying, hey, uh, I own this house that I'm renting. No, it doesn't work that way. But now I will say this, I mentioned briefly a dollar lease. You're like, okay, what in the world's that? So it's a dollar residual at the end of the lease period. So basically you've got a loan. I, I, I'm not sure why anybody, anybody would do that.
almost like you're li— it's almost like you're like renting rent to own is almost—
It, it is, it's a rent to own situation, but the problem from a tax perspective is a dollar lease, you could not write off that entire payment because the IRS views that as, okay, you've got a loan here because you're— if you only owe a dollar at the end of this thing, that means you own the asset once at that
At that point. You might as well just get a loan and just—
You might as well have a loan at that point.
Yeah. So, you know, when, when interest— which, I mean, this is a great time to talk about this, but as the Fed just said, they're going to increase interest rates.
Yes, absolutely.
Uh, when interest rates are higher, you know, do you think lease leasing becomes more of an attractive option over purchasing equipment?
It can, you know, and that depending on market conditions and how the lease is structured, you know, in a higher rate environment, producers are often looking for ways to manage those monthly, semi-annually, quarterly obligations and preserve their liquidity to maximize their working capital position where they're able to afford things. And leases will come in and offer that lower periodic payment because of that larger residual on the backside. So if you're looking for a cheaper payment to maximize that working capital, then absolutely in a higher interest rate time, the lease could be the way to go.
You know, and that's, you know, it's like you said, I mean, we walked in here and we were just talking about rates and, you know, I think sometimes, you know, our, you know, farmers and borrowers, sometimes they have to get creative when things like that happen. Because I mean, It's out of our control as the lender and it's out of their control. And it's— Oh, unfortunately, it's just the environment we're in right now. And, you know, they're still not like they were, you know, 30 years ago or 40 years ago, but still they are higher. And, oh, and they have— we haven't got the relief that a lot of, a lot of people had anticipated, you know, probably 18 to 24 months ago that we've been told, you know. You know, like I said, it's always funny because economists, they seem to always They're never very accurate. So they said for sure.
No. And also,
and, uh, so
An economists are about as accurate as the weatherman these days.
So we were just talking about that. So I think, you know, this is probably, this podcast is probably coming at a good time because maybe some of our guys and gals that, that do purchase may be leasing, you know, within the next couple of years and next year may be a good option for them.
Absolutely. And at the, you know, something to remember here, you know, when, when you have a lease, You have the ability to turn that back in. There's a lot in— always read your leasing contract. Absolutely. But if you have a, what I would call a moderate residual on the terms of that lease, if you get in a bind, a lot of times the leasing company will take that piece of equipment back and you might be able to get out of that, or you can trade into a different lease to get something that's more affordable.
Yeah.
So yet again, back to that flexibility to help you out.
Yeah. So, I mean, I, I feel like this is a pretty straightforward answer, but, you know, can anyone get a lease or are there specific requirements a lot of times when you're looking at getting a lease for your operation?
I mean it is just like any other financing arrangement. It, it revolves around a credit decision and an approval process, and it looks at the same financial strengths and weaknesses and repayment capacity, liquidity. They're, they're looking at all of that. Of course, you know, the larger the lease, the more in-depth that financial underwriting gets. Whereas with a smaller lease, then, you know, it's, it's a little bit easier, kind of similar to coming to us to get a smaller scorecard loan. It's, it's a pretty quick and simple approved and denied. But luckily in the Farm Credit System, we have larger loan limits into how far we can go. So even in the world of leasing, A half a million dollar lease is not out of the question to get that approved fairly quick.
Well, and that's one thing, you know, this next question I was gonna ask you, you know, I think one thing I've always, we've always been told here is yes, we're lenders, but I also feel like, you know, we're not CPAs, we're not financial planners, but at the same time, you know, we're still part of that person's operation and, and trying to help them make hopefully a Uh, educated decision on what's best for their operation by looking at their numbers. Or, you know, we're not just here to lend them money. You know, if they call, you know, I had a guy today call and say, hey, I'm interested in buying this piece of equipment. I'm not really sure, you know, what you, you know, I did some digging for them and, and, you know, so I feel like we're consulting as well. So as far as that goes, you know, how can River Valley help, you know, when looking at an operation, evaluating maybe what's best for them? And even if it's a situation, maybe they don't lease now, but maybe we, do their analysis for a loan that they've maybe a renewal on their line of credit, but we say, hey, maybe think about moving forward.
Hey, you're great right now, but I think maybe moving forward, maybe, maybe getting some leases would be a great option for you.
Sure. That's, that's what makes us different, you know, as being in the Farm Credit System is we're, we're specialized. We know agriculture. We're here for the good. We're here for the bad. And we're here to partner up. And that's what, that's what makes What we do, great. You know, every individual employee here at River Valley, in some way or another, we have a tie, a connection to agriculture in some way, maybe in a big way, maybe in a small way, but we know. And our lenders, you know, the training that we put everybody through and the experiences that they get to experience with multiple different operations. They're able to bring their experiences right to your operation and show you what's, you know, what's worked for somebody else, or what they've seen work for somebody else. And that, that's absolutely instrumental in our ability to be able to help our borrowers to succeed, because this is a partnership. You know, we're, you know, we're here for the borrower to be successful, because if you're successful, We are successful. And, you know, we've recently made it a big push with our staff here, our lending staff, to learn more about these leases because this is, like I said, you, you're not gonna go to another financial institution and be able to get these off the street.
That's, that's just not something you can get, but you can here. And that's, that also helps set us aside from other lenders out there. So definitely, if, if you're listening to this podcast, come in, speak with your loan officer, ask them about a lease, ask for that opportunity to look into that and get their thoughts and opinions on it.
I think, you know, I've got you here and I think I'd be remiss if I didn't ask, you know, obviously, you know, we talked about earlier with interest rates going up and different things, you know, you typically will send all the loan officers and really the whole staff kind of typically at the beginning of the year, you'll kind of send an outlook of what things that you've read. your research on where you're, you know, what the year looks like. Typically mid-year you'll send another one. We just got one probably a month ago. Kind of, can you talk a little bit about, you know, what you've seen this year? I know this year's, I think I've got, we've got a lot of farmers that are gonna have some good yields, which is around here in Western Kentucky, which is obviously a positive. But just what you've seen and, and what you're maybe seeing over the next 6 months and maybe heading into 2027, you know, just for for the operations around here and maybe some, maybe some, some benefits, some positives that are going to happen and maybe some negatives and maybe things to look for.
yeah, I see a lot of positives coming on the production side. We've been absolutely blessed, you know, here in the Jackson Purchase region with our crops. I would be hard pressed to say this may be one of consistently across the board, one of the better crops, if not the best crop.
And we needed it this year.
Oh, we needed it.
This was a year we needed it.
The last few years have been pretty rough. You know, even to the point where we've had such excess heat previously that it messed up pollination, which absolutely killed some corn crops. It didn't matter if you had center pivot irrigation or not.
Yeah.
And, you know, usually that's a big deal. But with the heat that we had in those times and then the droughts that we had in those times, it just, it made for some terrible crops. But on the flip side, this year we had some of the most timely rains we've, we've ever had. And even the late bean crops, you know, we— I was getting a little concerned there. I was like, well, you know, it's a, it's a little dry.
Yeah.
And we just got those rains and they hit and those beans are looking great.
I know. I talked to one of my guys. I mean, he was like, they're the best. I mean, he's farmed for 30 years. He's like, they're the best beans he's ever had.
Absolutely. I know. It's phenomenal. The The corn yields that I'm hearing, I'm not going to share any of those because I don't want anybody getting jealous or saying somebody's a liar. But
yeah,
even white corn. I'm from Callaway County, so we see a lot of white corn over in that area. And it's, oh, it's beautiful. It's absolutely beautiful. You just, I don't know, we're very blessed. And then we flip over to the market. We're getting a little bit of a rally. in the market. And then not only that, there's carry in the market. So, you know, I expect to see some, some grain bins filled up and holding that on later into that Jan, Feb, March delivery, just to maximize the profit on that. And from what I can see, it's there because as we all got to be cautious of our lines of credit, when we have that grain in the bin and you've got that your line of credit is composed of that grain that's in the bin, there's a carry cost there from the interest. So, but the gains that I'm seeing on this are well above the carrying cost that's out there.
Because we talked about that last year. It was like, you know, obviously even the, the inner, you know, the, the energy to keep that grain bin dryer on and everything else, you know, you got to factor all that in whether you— is it worth it for that difference and selling point, you know. And sometimes it isn't, sometimes it is.
Absolutely you can.
And it's all, again, you know, it's all— I mean, it's all just a game anyway. I mean, I think, you know, you just do the best you can.
And yeah, if you're looking to the future market and you're like, oh man, I can get 3 more cents a bushel out of this if I hold it to March. And but, you know, this is some grain that you've harvested in November or October, November, and you've got to carry it all the way. You, you have eaten up that potential gain that you could have gotten when you could have just pulled it out of the field and ran it across the scale and sold it.
Because you're paying interest on that, you know, your line of credit, like you said, and those things.
Absolutely. But as far as the grain side, I'm seeing some real positives out there. I would encourage everybody, every producer, to be cautious. Don't, don't get too excited about it, and make sure that you're not going out and making excess capital purchases and loading yourself up on the basis of just one good year. You know, be, be sure to rebuild that working capital because we've all, we've all taken some hits over the last couple years to our working capital position. So you utilize every opportunity that you can to build that back up and then always be thinking forward to the next year into 2027. And do those budgets, look at your crop plan, and try to go ahead if you can, if you've got a good idea of your production. This is what I always tell a lot of guys. I'll see, look at your crop insurance data and look at your average yields and see what your average production is and think, all right, let's say if we had a little bit of a drought or something, I, I, what, what am I minimally going to produce that I know I'm going to get?
All right, let's go ahead and try to lock that in on the market and get that contracted. Because the earlier you can lock in your profits, that gives you more room to play on the backside with that excess to generate more money. But the key is you want to try to lock in that profit in the beginning. Otherwise, if you don't lock it in and you're playing the gambling game, you're not going to know how your year is going to end up. You don't, you don't know if you can make—
You have no number there.
You have no number. So you don't know if Can I afford to upgrade my planter? Can I afford to do this? You can't plan for the future if you're gambling into the future. So it's always good to try to lock in that profit early. Now, yes, I mean, markets go crazy and you're going to be like, oh my gosh, I could have, I could have got 10 more cents a bushel. But that's okay. Don't look at it that way. Always look at it. I'm setting my basis. I'm locking my profit right here, right now. I know what I'm going to get. But also leave that excess to where you can gain on the backside.
Well, I think that's the reason I wanted to catch you before. I mean, I know we really came here talking about leasing versus purchasing, but I thought, you know, it's about, you know, it's, you know, it's mid-September and, you know, driving into harvest season. And, and so, you know, I felt like I got you, got you in the hot seat and may not get you back in here because you're busy.
So. Well, I'm pretty sure y'all was just digging at the bottom of the barrel to get me on.
Yeah, we ran out. We ran out of, we ran out of gas, to be honest with you.
That's what I figured.
So, well, Logan, I mean, and I, I, we always joke cuz like the Chief Credit Officer position, sometimes it's a bit of a thankless job because you're the bad guy. Sometimes you have to be the bad guy, but unfortunately that's just the position that you're in. And, but I know you put a lot of, you put a lot of long hours in. I don't think people realize, and I'm not just saying this cuz Logan's here. I mean, he, I mean, I try to get here early, but I mean, this guy sometimes is here at 6:30 in the morning. So. And, uh, maybe earlier than that sometimes. I don't know for sure.
I've done, I finished my second auto call. I know.
So, you know, he puts a lot of long hours in and, and he does it cuz he wants, you know, I, I've kind of learned, especially this year, you know, obviously Kip was the CCO, you've moved into the role. And I think one thing I've definitely learned is at the end of the day, when you're in that role, you just want to continue to put us in a good position as an association and for the borrowers to be successful in the future.
And, Sometimes you have to make those tough decisions or, you know, calls or whatever, but it's, it's the right decision and call because you don't want to continue to put somebody in a bad position moving forward either. And, and you've, you've talked me through— I've had a few, had to have a few of those conversations this year. And, and, uh, but we appreciate everything that you do and, and, uh, we're glad to have you here and, and glad you took time to, to meet with us today and give us your insight.
Well, I, I appreciate it and I I enjoy talking and especially talking about these subjects and any, anything to do with lending. And, you know, I guess a final parting comment here, and you mentioned tough and difficult situations. When, when we're having to make a decision on something, especially something that becomes difficult, we all gotta remember that this is a cooperative owned by our members. And every decision that we make doesn't just only affect one borrower, but it affects all the borrowers. Because at the end of the day, if we make the wrong decision, that could, that could reduce your patronage.
Yeah.
So end of the day, it's all about the big picture as a whole and all the members and doing what's right for all the members. That's, that is my objective and my goal.
Well, we appreciate you. And, and again, thanks for taking the time to talk today. And, and we'll have you back on here soon. So Thanks again for joining us on Back to Your Roots. Thanks for tuning in to Back to Your Roots, where we dish the dirt on all things ag. Be sure to never miss an episode by following and subscribing. While there, leave us a review about what you want to hear next. Stay in the know between episodes by following us on Facebook, Instagram, Twitter, LinkedIn, and TikTok. For more resources, go to our website at rivervalleyagcredit.com.