The agricultural equipment market is on the cusp of a major turnaround, driven by strong commodity prices due in large part to burgeoning demand for corn-based ethanol and other biofuels. That translates into increased farm income, increased investment in farm equipment—and increased demand for steel.
Research is also under way to design new equipment to process other cellulosic or biomass materials, besides corn and grains, to be used as feedstock for the growing number of ethanol plants in the U.S. and abroad. To satisfy new demand for alternative fuels, farmers will likely need to upgrade their equipment for years to come. This is good news for steel suppliers, especially since many farmers will be looking to invest in larger, high-horsepower tractors and combines, which are more steel-intensive.
“Ethanol will be a big push, but we haven’t seen the results yet. Once it comes through, probably sometime next year, it will be big,” says Lourenco Goncalves, president and chief executive officer of Metals USA Inc., Houston.
Paul Labriola, president and chief executive officer of Robinson Steel Co. Inc., East Chicago, Ind., expects to see a small pickup in demand from the agricultural equipment sector even this year—“an improvement from the flat to slightly down demand in the last few years.”
U.S. retail sales of agricultural equipment actually started this year a bit behind 2006, says Charlie O’Brien, vice president of agricultural services for the Association of Equipment Manufacturers in Milwaukee, Wis. “But in the last couple of months there has been a good uptick, bringing it close to where it was last year.”
Through May, AEM reported farm tractor sales of 94,293 units, virtually unchanged from the first five months of 2006, with two-wheel-drive tractors down a slight 0.2 percent and four-wheel-drive tractors up 9.7 percent (see chart). Much of the weakness in two-wheel-drive tractors was in those with under 40 horsepower. A total of 1,928 self-propelled combines were sold in the first five months of 2007, up 5 percent from the like period in 2006.
“We are at the threshold of a change,” says Eli Lustgarten, senior vice president of Longbow Securities in Cleveland, with demand being bolstered by the “tremendous step up of ethanol” and the resultant increase in commodity prices and farm income. Prices are sky high not just for corn, but for most agricultural products, he adds.
The turnaround has already begun, maintains Frank Manfredi, president of Manfredi & Associates, Mundelein, Ill., publisher of the Machinery Outlook newsletter. Farm orders for large tractors began picking up in January, and that demand for tractors could increase by as much as 6 to 10 percent this year vs. 2006, he estimates.
“Ever since the middle of the first quarter we’ve seen a significant increase in demand, especially for equipment used to harvest corn,” says Doug Griffin, vice president of marketing, North America, for Agco Corp., Duluth, Ga. Industry wide, he says, April high-horsepower tractor sales were up about 30 percent vs. April 2006. Planters were up about 14 percent, while tillage tools were up 40 percent.
So-called “industrial tractors” and other small machines used for lawn mowing, golf course maintenance and rental equipment will not fare as well, however, says Charles Yengst, president of Yengst Associates, Wilton, Conn. Such low-end equipment is more dependent on consumer spending and the residential construction market. “With housing down, demand for these tractors could continue to drop into next year.”
Driven by increases in high-horsepower tractors, Deere & Co., Moline, Ill., North America’s largest agricultural equipment producer, expects its worldwide sales to grow 13 percent this year. “That is much higher than we anticipated when we started the year,” says Ken Golden, a Deere spokesman.
But much of the anticipated demand has not really hit yet, says Gerry Salzman, senior director, farm equipment, for the Case IH unit of CNH Global NV, Racine, Wis. Farmers generally make their equipment commitments in the third and fourth quarters of the year. “So any increases we’ve seen thus far relate to the last half of last year,” he says, and don’t reflect the effect of the recent runup in commodity prices. Currently, the market price for corn is $3.50 to $4.00 a bushel, over $1 higher than a year ago, largely due to increased demand for corn-based ethanol.
“The agricultural sector was in a balanced state with supply relatively meeting the demand of the population, and then came the ethanol boom, which affected the balance, especially for corn,” explains Bruce Scherr, chairman and chief executive officer of Informa Economics Inc., Memphis, Tenn. He says ethanol has already added about 1 billion bushels of annual corn demand—a trend not expected to ease for some time.
The U.S. Department of Energy’s Billion Ton study projects that annual ethanol demand could rise to 60 billion gallons by 2030. According to Kevin Shinners, professor in the biological systems engineering and mechanical engineering department at the University of Wisconsin, to brew up that much ethanol would require 600 million to 700 million tons of biomass per year. Today, a total of about 600 million tons of corn, soy, wheat and other grains are produced in North America annually. “That is just enough to produce the ethanol that we would need, which means that we would have to double biomass production,” he says. That’s why the University of Wisconsin and other universities are researching new methods and feedstocks to increase biomass production, including modifications to current agricultural equipment (see related story).
Not only have steel suppliers seen a bump in demand for agricultural machinery to harvest the grains and grasses use to make ethanol, they’ve also seen orders for materials used to construct the many ethanol plants sprouting up across the countryside. According to the Washington, D.C.-based Renewable Fuels Association, the U.S. ethanol industry produced a record 4.9 billion gallons of ethanol at 110 biorefineries in 2006, up 25 percent from 2005, as 15 new plants came online last year. The RFA says that at least 73 biorefineries are under construction and another eight are expanding production, which will mean another six billion gallons of new ethanol capacity by 2009.
The number of ethanol plants scheduled to come online is far above the government mandate, note Lustgarten and Manfredi, who question whether the marketplace will be able to absorb all the planned ethanol production. Finding enough trucks to transport the feedstock to the ethanol plants, and enough tankers to transport the fuel to the refineries, could be a challenge. And if the farm sector ramps up to produce enough corn for a projected demand that never comes to fruition, the oversupply could be ruinous to grain prices. “Given that these plants are largely distilleries, Iowa, Illinois and Nebraska could become the biggest producers of whiskey in the world if they can’t use all the corn produced there,” jokes Manfredi.
Nevertheless, most experts are betting that with oil and gas prices at historically high levels, and cries getting louder for new renewable energy sources, ethanol is no flash in the pan. Thus the need for steel to produce agricultural equipment, as well as ethanol storage tanks, refineries and trucks, is real and promising, says Bill Jones, president of O’Neal Steel Inc., Birmingham, Ala.
Partly to meet the increased demand for ethanol, U.S. farmers have increased their corn acreage. According to the U.S. Department of Agriculture’s Prospective Plantings report, released in March, farmers expected to plant 90.5 million acres of corn in 2007—the most since 1944 and up about 15 percent from last year. While that increase in corn will be partially offset by a decrease in plantings of other farm commodities, notably soybeans (down 11.1 percent) and cotton (down 20.9 percent), overall plantings will increase about 2 percent to 315.3 million acres, reports analyst Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa.
Unlike in the past when farmers have been hesitant to increase corn output for fear of overproduction, strong demand for ethanol and other agricultural products worldwide virtually assures that the market won’t penalize them with lower prices, says CaseSalzman. Ethanol production alone adds 25 to 50 cents to the value of each bushel of corn, or as much as $5.5 billion over the entire corn crop, according to the RFA.
Meanwhile, prices for other farm commodities are also rising. Soybeans, for example, are up about $1 a bushel, largely due to lower supply as about five million acres have been supplanted by corn, Lustgarten notes.
The increase in demand for farm commodities is not just coming from the biofuel sector. “As countries become more industrialized, they eat more meat and need more grain,” Salzman observes. “Also, populations are growing worldwide at a fast rate.”
The end result is that 2007 net farm income is expected to hit $66.6 billion, up 10 percent from 2006, due to projected record agricultural commodity cash receipts of $258.7 billion, according to the USDA.
2007 government direct payments are forecast at $12.4 billion, down 24 percent from $16.3 billion last year. Some observers are concerned that if the new federal farm bill is passed in its current form, subsidies will fall even further. “I’m not sure what impact it will have,” says Yengst. “There is less give-away money [in the proposed bill] for farmers, so they will need to make money on what they put into the ground instead of relying on subsidies. A lot of farmers have gotten a free ride in the last several years. We will see that drop in the next few years.”
Deere and other farm equipment makers “remain keenly interested in the various ideas for the farm bill and will actively seek to have input into and understanding of this legislation,” says Golden, who declined to speculate on the effects of the proposed bill now in its early stage.
Overall, agricultural equipment manufacturers are pleased by the economic outlook for the farm industry. “Long-term projections for both ethanol and grain are up, which should mean favorable crop prices for at least the next three to five years. That means farmers can afford to pay for the technology to increase production—including new equipment,” says Agco’s Griffin.
“When farm receipts grow, it generally correlates to increased durable goods purchases. Given the growing number of large farmers with an enhanced ability to buy new equipment, farm equipment manufacturers are in a good place to benefit,” adds Informa’s Scherr.
“Farm machinery is at an important point in its history, moving from ever increasing mechanization to automation,” says Golden. Recent innovations include self-guided steering systems using GPS (global positioning system) technology and giant tractors with continuously variable transmissions capable of planting up to 60 rows of corn at one time.
“If farmers see an opportunity to decrease cost and be more efficient, they will do so,” says Salzman. Lustgarten agrees, though he forecasts a steady 5 percent growth rate rather than a dramatic boom for ag equipment sales.
New Generation
of Biomass Equipment
on the Drawing Board
The nation’s push for energy independence is causing skyrocketing growth of ethanol and other renewable energy sources. That push, however, is also putting pressure on feedstocks, which in the case of ethanol has been largely corn. To ease that burden and lower costs, several universities are researching the potential of using “cellulosic biomass,” such as corn stover (stalks), wheat straw, switch grass and other perennial grasses and woody crops to ferment alcohol. Harvesting and handling such material calls for the design of new types of agricultural equipment.
Just what form this new equipment will take and when it will be commercially available is still unknown, “But certainly there are a lot of exciting things going on in the industry,” says Charlie O’Brien, vice president of agricultural services for the Milwaukee-based Association of Equipment Manufacturers.
Given certain initiatives currently on the table, there is a need to double U.S. production of biomass, says Kevin Shinners, a professor at the University of Wisconsin. Those initiatives include the U.S. Department of Energy’s Billion Ton study, which calls for the annual production of 60 billion gallons of ethanol for transportation fuel, replacing 30 percent of the fossil fuels used for that purpose by 2030; as well as the 25x’25 initiative, supported by the non-
profit Energy Future Coalition and the Bush administration, to get 25 percent of the nation’s energy from renewable sources by 2025.
In addition, the Senate passed an energy bill late last month that, on top of higher fuel efficiency standards for automobiles, calls for a sevenfold increase in ethanol production, to 36 billion gallons per year by 2022.
To reach those goals, there is a need for more, more-advanced equipment in the field, Shinners says. “We will not necessarily need to have two times as many combines, but the ones we make will need to be more productive.”
Since there is a limit to how much more conventional grains can be grown, much of the current research is focused on cellulosic material, including its production and harvest, transportation and storage issues.
Initial research at the University of Wisconsin, Iowa State University and other institutions has been centered on corn stover (corn stalks, leaves, husks, etc.), which typically is dropped back onto the ground as farmers harvest the grain. “What the farmers are looking for is to harvest the stover as well as the grain simultaneously, while keeping the stover separate from the grain,” Shinners says, noting that a lot of research is being done on such “single pass” systems.
One problem with harvesting is contamination by soil, which could cause problems in the refining process, says Stuart Birrell, an associate professor in Iowa State’s agricultural and biosystems engineering department. Another major problem is the airy density of the stover. “Stover has a density of three to four pounds per cubic foot. To load a truck to its maximum load, it needs to get to 11 to 14 pounds per cubic foot. That’s a big difference,” he notes.
Researchers are working to design devices that would chop the stover to increase its density, either in the form of attachments to conventional equipment or a whole new machine. Iowa State is taking the attachment approach, working on developing one $10,000 attachment for the header of the combine and another $10,000 attachment for the rear, therefore adding $20,000 to an approximately $250,000 combine. “We are working with Deere on a prototype we are hoping to develop later this year that could enter Phase I testing on a producer field within two years and have limited release within three years,” Birrell says.
Even chopped or shredded stover might not be dense enough for economical transport, says Shinners. “While there are opportunities to size reduce it and compact it at the farm level, there might be a need for devices to form it into pellets, cubes or briquettes to improve transportation efficiencies.”
Use of perennial grasses is possible with existing equipment designed to harvest hay and forage for animal consumption, though with some modifications, Shinners says. “We don’t currently have large acres of perennial grass growing. Farmers only grow enough for their animals. So there is a need for some agronomic changes before even thinking about the equipment needed to harvest it,” he adds.
Whether steelmakers and service centers will ever be supplying materials for a new generation of farm equipment depends on a major shift in economics. To make it worthwhile for farmers, stover and other cellulosic material would have to sell for at least $60 a ton, up from current estimates around $35 a ton. “Farmers can’t make a profit at that price,” says Shinners. “However, the economics get more and more favorable as we pay more for gasoline.”
