Is the agricultural machinery rental market ushering in spring?
Editor's note: Along with the increase in rural labor migrating to work in cities and the acceleration of land transfer, the number of new-type agricultural operating entities in China is growing day by day. The expansion of operating scale has made their demand for large agricultural machinery and high-performance, compound machines increasingly strong. But limited payment capacity is restricting their ability to upgrade agricultural machinery. As the preferred method of purchasing agricultural machinery abroad, can financial leasing solve the financing difficulties of new-type agricultural operating entities? What is the market prospect of this model? What constraints remain? Our reporter conducted on-site interviews with farmers and discussions with industry insiders.
With only enough money to buy one piece of agricultural machinery, they "bought" an agricultural machinery service team
April 17, Gongzhuling City, Jilin Province. Although this spring day was like any other, with gusts of wind from time to time lifting dust from the ground into the air and making it hard to keep one's eyes open, for Xue Yaohui, chairman of the Wanxin Farmers' Professional Cooperative in Shanqian Village, Liufangzi Street, this day was definitely a good day.
Because on this day, the Wanxin Farmers' Professional Cooperative was officially included in the agricultural machinery financial leasing pilot carried out in Jilin Province by ABC Financial Leasing Co., Ltd. of Agricultural Bank of China. Xue Yaohui signed the contract with ABC Leasing on behalf of the cooperative, and the cooperative members immediately drove away 9 high-horsepower tractors, adding a "sharp tool" for the upcoming spring plowing.
Old Xue is a farmer born and raised in Shanqian Village, and his family's more than 1 shang (15 mu) of land has always been used to grow corn. In 2007, he initiated the establishment of the Wanxin Cooperative. In 8 years, its members grew from the initial 7 households to more than 1,100 households today, and its business scope expanded from planting to breeding, agricultural machinery operations, and grain storage and purchasing.
Today, the cooperative has more than 7,700 mu of transferred land, but its land operation area has reached 51,000 mu, covering 7 surrounding townships. In Xue Yaohui's view, agricultural machinery has played an important role in the expansion of the cooperative's scale. "How many farmers the cooperative can work with and how large a scale it can consolidate depends crucially on agricultural machinery as the lever. But what worries us most is also agricultural machinery, because for the cooperative, purchasing agricultural machinery is the largest investment. Not only is the amount of funds per unit large, but upgrades and replacements are also fast."
Previously, the Wanxin Cooperative owned 89 units/sets of agricultural machinery for plowing, planting, and harvesting, but most were small and medium-sized agricultural machines. The maximum power of its tractors was only 90 horsepower, and it had no high-horsepower machinery. Many harvesters were also outdated in function and urgently needed replacement. But where would the funds come from?
In the past, these agricultural machines, whether worth 200,000 to 300,000 yuan or 400,000 to 500,000 yuan, were almost all purchased by the cooperative using its own accumulated funds. "It was all money squeezed out from between our teeth. It is not that we do not want loans. Borrowing in the cooperative's name is a legal-person loan, which requires qualified collateral, and we cannot produce much that meets bank requirements. The only successful loan required paying loan interest, guarantor company fees, and a deposit, and also placing 900,000 yuan in cash in the bank. The cost was too high," Xue Yaohui said.
But by choosing financial leasing, for a 200-horsepower tractor worth 1.4 million yuan, the Wanxin Cooperative only needed to pay a 20% down payment after dealer guarantee and could drive it away. The remaining principal and interest would be paid off in 2 years for the tractor and 3 years for the harvester. After paying it off, the cooperative would fully own these "big iron oxen." "These agricultural machines have a total price of more than 5 million yuan. We would not even dare think of buying them all at once relying on our own accumulation. But now, like installment payments, spreading the expenditure over 2-3 years makes the problem much smaller." Xue Yaohui's confidence in repayment came from the cooperative's comprehensive income of about 3 million yuan each year.
One piece of agricultural machinery became an agricultural machinery service team, greatly improving operation efficiency. In Xue Yaohui's vision, in the next 3 years, the cooperative's operating scale will increase several times again. Financial leasing helped him solve the difficulty of purchasing agricultural machinery, and he feels even more motivated about future development.
Broad market prospects, but still in the initial stage
The funding difficulties encountered by Xue Yaohui and the Wanxin Cooperative are not isolated cases. In recent years, along with the increase in rural labor migrating to work in cities and the acceleration of land transfer, China's agricultural development has entered a new stage, shifting from traditional decentralized household operation to a new operating system combining intensification, specialization, organization, and socialization. The expansion of operating scale has made new-type agricultural operating entities' demand for large agricultural machinery and high-performance, compound machines increasingly strong. At the same time, factors such as the shortage of rural labor and rising labor costs objectively also require raising the level of mechanization. However, faced with large agricultural machinery costing hundreds of thousands or even millions of yuan per unit, the purchasing power of farmers or cooperatives is indeed limited.
The agricultural machinery purchase subsidy policy launched in 2004, although it played a certain role in supporting various agricultural operating entities in purchasing and using agricultural machinery and in advancing the development of agricultural mechanization. But since the gradual implementation of the "full-price machinery purchase" fixed subsidy policy, the problem of purchasers' shortage of funds has become increasingly prominent.
Solving the problem of funds for purchasing agricultural machinery through loans is one way out, but bank loans have long approval times and many procedures, require effective collateral, and the repayment cycle usually does not match the agricultural production cycle well, making it difficult for purchasers to obtain loans while also bearing relatively high funding costs and repayment pressure.
Agricultural machinery leasing, which combines financing and goods, makes it possible for various agricultural operating entities to "spend small money to accomplish big things." Chen Peihua, president of ABC Leasing, introduced that because the agricultural machinery itself as the leased subject matter is effective collateral, leasing business procedures are relatively simple, and the "thresholds" are lower in terms of farmer credit requirements, down payment ratio, financing amount, collateral, application procedures, and handling fees. The repayment method of leasing is also relatively flexible. According to ABC Leasing's design, the repayment cycle is relatively matched to the agricultural production cycle, and principal is repaid during periods with ample cash flow such as when subsidy funds are cashed and during the autumn harvest, greatly reducing the repayment pressure on farmers and cooperatives.
In fact, the agricultural machinery leasing business has a history of decades of development in agriculturally developed countries in Europe and America, and is the preferred way for farmers to purchase and use agricultural machinery and equipment. Due to reasons such as a lack of understanding of financial leasing, this business started relatively late in China and progressed slowly. Data show that the total number of leasing companies currently supervised separately by the China Banking Regulatory Commission and the Ministry of Commerce has exceeded 2,000, with assets approaching 3 trillion yuan, but only a handful of companies carry out agricultural machinery leasing business, and their asset scale is also very small.
Some industry insiders estimate that in the coming years the market capacity of agricultural machinery leasing will reach the scale of tens of billions of yuan. The scope of agricultural machinery leasing will also connect with the agricultural industry chain, covering all links before, during, and after production. "Financial leasing serving 'agriculture, rural areas, and farmers' is a blue ocean market full of business opportunities," Chen Peihua said.
Policies boost development, but constraints still await resolution
Because of its flexibility and convenience, financial leasing business provides a new way to solve the financing difficulties of "agriculture, rural areas, and farmers." But the development of financial leasing business also requires the cooperation of many conditions.
Since last year, the State Council executive meeting and relevant documents from the China Banking Regulatory Commission and the Ministry of Agriculture have mentioned agricultural machinery leasing many times. At the State Council executive meeting in April last year, the importance of carrying out agricultural machinery financial leasing services was emphasized. In July, the China Banking Regulatory Commission and the Ministry of Agriculture jointly issued guidance, proposing to vigorously develop agriculture-related leasing business and actively innovate new agriculture-related leasing products. In August, the Ministry of Agriculture issued a notice encouraging the promotion of establishing financial leasing companies mainly serving "agriculture, rural areas, and farmers," and encouraging various financial leasing companies to carry out financial leasing services for large agricultural machinery equipment and facilities. This year's No. 1 Central Document also clearly proposed to "carry out pilot financial leasing of large agricultural machinery." Industry insiders analyze that policies boosting the development of agricultural machinery financial leasing business will help solve the difficulty of various agricultural operating entities being unable to purchase machinery due to insufficient funds, stimulate machinery purchasing potential to a greater extent, and also benefit the overall development of agricultural mechanization.
The reporter also learned during interviews that the development of agricultural machinery leasing business still faces some constraints. At the policy level, in the current implementation of the agricultural machinery purchase subsidy policy, financial leasing companies are not within the scope of subsidy recipients, so they cannot enjoy subsidies when directly purchasing agricultural machinery to carry out leasing business. At the same time, customs supervision policies for imported agricultural machinery also impose some restrictions on financial leasing companies carrying out business. In addition, factors constraining the speed and quality of the development of domestic agricultural machinery financial leasing business include the not-high degree of scale in China's agricultural production, the imperfect rural credit system, the lack of understanding of financial leasing by the agricultural machinery industry and new-type agricultural operating entities, and the limited management level of financial leasing companies.
Chen Peihua suggested that in the future, relevant policies such as agricultural machinery subsidies should be further improved, and tax reduction and exemption policies should be used to encourage agricultural machinery financial leasing operating entities to carry out business innovation. On the other hand, the construction of the rural leasing market and financial environment should be strengthened to create a good operating environment for the development of agricultural machinery financial leasing.
◆Further Reading◆
Financial leasing refers to a leasing method with the dual functions of financing and goods, in which the lessor purchases equipment selected by the lessee and leases it to the lessee for compensated use within a certain period.
Financial leasing business is generally aimed at items with relatively long service life and relatively high value, so this business is very common in the field of engineering machinery. By separating ownership and use rights of the item, it has the characteristic of combining financing and goods. When problems arise, the leasing company can recover and dispose of the leased item, so when handling financing it does not impose high requirements on the lessee's credit and guarantee. Moreover, under normal circumstances, financial leasing credit lines are relatively large and repayment periods are relatively longer, so it is very suitable for the field of agricultural machinery.