Used Tractor Valuation - A Practitioner's Perspective

Originally written on May 1, 2017

Scene was a Board Room, and a new person inducted into the senior management was being introduced. His first interaction was with the Policy & Compliance team. He shot a question to the team - " How do we value Used Tractors ? ". Promptly he was shown a grid which the policy team had put forth. He quickly glanced through the grid and waited.... There was silence...He said .." I'm expecting one of you will tell me how you arrived at the values in the Grid ". 

One of the members from the Policy Team stepped up and said " These are values that were paid for the respective models which have been tabulated with a conservative mark down, so that we as financiers are safe in funding the respective models ".

The Senior looked through the tabulation and asked " What is the basis for this Values ? "

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LET's ANALYSE

In spite of explanation from the team, why did the Senior ask "Basis for Values" ? His point was - " If I as a customer am prepared to pay Rs.100000/- for a product, what is its true price ? How was the Rs.100000/- arrived at by the customer ? What was the rationale / logic behind the same ?

Depreciation ?  Cost ? Maintenance ? Usage ? What else ?

In trying to arrive at these, here are some pointers to the logic used :

1.           USEFUL LIFE OF A TRACTOR    :       

The engineering annals peg this @ 15 years. Yet the Financing systems follow something called the Modified Accelerated Cost Recovery System (MACRS), which pegs the life @ 8 years.

2.           COMBUSTION QUALITY                 :

Have you heard of the different possible types of Smoke that is emitted after combustion of fuel :  i.               Transperant,     ii.            Black,   iii.           Bluish,  iv.          White

Each of these have a meaning to communicate

3.           LUG QUALITY    :

I quote H J Hine, in this context, who has researched very widely. On the importance of Lugs, he says, "An Inspection of the impressions left in the soil by the lugs of the wheels when the tractor is pulling its load will give sufficient guide to whether any excessive slip is taking place. "

4.           HOUR METER READING :

The first question that crops in all our minds is how many Hours per year is ideal ? It has been pegged at 350 / 450 / 600 / 750 Hours and in some organizations 1000 Hours. Yet 600 - 750 Hours would be a good start. This metric tells us two scenarios to be careful about :

(a)         Usage below 300 hours per annum

(b)         Usage above 1500 hours per annum

5.           STANDARD DEVIATION COMPONENT    :

This is a one-time exercise, where you arrive at a set of values - Brand wise.

Let's start from the basics - Standard Deviation is defined as "a quantity expressing by how much the members of a group differ from the mean value for the group." 

So how is it important to us ?  

Every model has a pricing pattern for its new models.

Take up the popular selling models and compare them year on year and trace the movements.

Take up the low selling models and compare them year on year and trace the movements.

These will aid in arriving at a Brand Wise Standard Deviation.

In many cases, the original Invoice is not available. To apply depreciation, we need to be sure of the rate that was paid originally. To arrive at this, this standard deviation has been very useful. My personal experience in using this model has been a very successful one. 

 6.           USAGE

This holds a very critical perspective in assessing value. The wear and tear is considerably higher if the usage is a Non-Agri application. We typically use a formula, which is more from practical know-how and experience. This is also illustrated with an implement.

We generally keep tabulated the HP, Draft and typical running hours for common implements by geographies, for ease of calculation. This is a Good Practice.

7.           HIRE Vs BUY PRINCIPLE

A recent conversation with Mike ( http://asktractormike.com/ ), helped in understanding rough costing pattern.

Typically, we ought to be charging based on world standards, about Rs. 9.10 Per Hp per hour.

So going by a 42 HP tractor, we would have 42 X Rs. 9.10 X 6 hours = Rs. 2300/- per hour.

Our Patterns indicate Rs.1 per Hp per hour. These can go upto Rs.1.60 per Hp per hour  depending on geography.

Typically a viability calculation will compare a Hiring with buying a second hand tractor, and this costing factor plays a major role.

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So a value of a tractor is influenced by numerous factors. Yet it is possible to draw a model around these factors and build a realistic and more practical grid, which will be nearer the intrinsic value of the asset and will be safer for purposes of funding..

The factors of demand and supply may influence the rates, and yet a rate arrived in accordance with these rates will help us stayed rooted to our basics and avoid excess irrational exposures. We need to realize one thing - Used Tractor Funding provides excellent returns if only one knows how to wield it.

With every dealer pushing sale of new tractor every 3rd or 4th year, where predominant buyers are repeat customers, market will soon be flooded with Used Tractors taken back in exchange. Manufacturer redemption of models is one method. Channelized sale of buy back models is the other way out. Can we tether ourselves together to do it the right way ?