After a decade of record sales fueled by biofuels, hefty grain prices and tax incentives, the U.S. farm equipment industry now faces a prolonged slump in expected sales.
Deere & Co., the world's sales leader in tractors and harvesting combines, anticipates sales of farm machinery will fall 20% in 2015, followed by a 9% decline in 2014, thanks in part to record harvests, lower crop prices and falling farm income.
Deere reported a 20% drop in its fiscal fourth-quarter profit from a year before, with a 32% plunge in income from its farm-machinery business alone.
Nationwide, sales of all Four-wheel-Drive tractors fell 44% from October 2013 to October 2014, according to the Association of Equipment Manufacturers. Sales of self-propelled combines fell by nearly 50% in the same time period.
"We're going to see continued softening for the next year, maybe two," says Terrance Wynne, senior economist with Iron Solutions, a farm equipment market intelligence company based in Franklin, Tenn.
In the U.S., total market valuation for Ag equipment is $64 billion for franchise dealers, including income from new and used equipment sales as well as service. There are just fewer than 6,000 dealer-owners, with 8,000 dealer stores since some owners have chains, or multiple stores.
"In the last two years equipment makers really pushed equipment into the market, taking advantage of tax incentives and high net farm incomes to push more equipment into the market than what was truly demanded," says Wynne. "When we sell down the current inventory and sell down the oversupply of corn, that's when we will return to a more normal market."
Equipment makers got good news in early December when the U.S. House of Representatives voted to extend tax incentives, known as Section 179. The IRS Section 179 provision allows farmers and business owners to upgrade machinery and make other qualifying purchases while writing off the full purchase price in the current tax year. From 2010 to 2013 farmer buyers saved 10 to 15% from the section 179 tax write off. Another 10% savings came from dealer incentives on high cost items.
Dealers must now become more innovative to sell down inventory. "We've been talking to a lot of large dealer groups sitting on big inventories – one has $200 million of new equipment at seven stores," says Wynne. "Their goal is to get that down to less than $100 million in the next year. They're looking at regional strengths, or even moving the equipment out of the country, but that's expensive."
Dealers have a significant supply of used equipment right now and that's going to drive down prices. That used supply will put pressure on dealer capacity, which pressures used equipment prices.
With so much volume of new and used equipment clogging up the market, pricing is how dealers will move inventory, but farmers have closed their wallets for the time being. They are working through crop budgets that show projected losses with current input costs and expected crop prices.
The farm equipment market has been riding high for some time now. Following record farm income over the last three years, big combines and high horsepower tractors led U.S. farm equipment sales. Average new prices for all new tractors grew from $68,000 to $92,000 the past five years. "Some of that increase is technology related, some is inflation and some is just better buying power," says Wynne. "Since 2009 there's been a 40% increase in demand for all new units of equipment."
Using historical USDA (U.S. Department of Agriculture) price data, machinery prices increased 4.65% per year from 1973 to 2013, and 5.94% per year from 2008 to 2012.
Used equipment discounts
That sharp demand in new sales fostered a used equipment supply bubble. A normal trade cycle is 3 to 4 years, when warranties begin to run out. Farmers had money in their pockets and a desire to avoid taxes; dealers tempted them with MUD (multi-unit discounts) and rollover programs, where farmers trade combines each year to get the latest technology. Those programs shortened the typical trading cycle, driving up used supplies leading to a 'push' market and discounts on used equipment. (A pull market is when manufacturers sell based on demand, creating a natural supply of used equipment.)
What will happen next? It depends on corn prices, says Wynne. If prices stay below $4.50 per bushel for corn, farmers won't buy much equipment because that is near cost of production for most producers.
Meanwhile the used market has a lot of high quality 'near new' equipment available now, at very good prices.
"That should drive sales, despite low corn prices," he concludes. "There will be a significant used supply sell-down in the next year."