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Tractor sales through the first five months of 2018 are up 5 percent compared with 2017. (Photo courtesy AGCO)

Time to Reap for the Agricultural Market

Strong farm incomes, low inventory levels and tax reform has made heavy equipment makers optimistic

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The seeds have been planted for a strong year for the North American agricultural equipment market. Farm incomes have been growing since the barren years of 2015-16. Inventories at equipment dealers are getting in balance. And tax reform is likely to put a few more dollars in the pockets of the average farmer. 

“Things are shaping up well,” says Dan DeMare, western region sales manager for Heidtman Steel Products, Granite City, Ill. 

“We do have customers who are very involved with agriculture,” says Mike O’Brien, president of O’Brien Steel Service Co., a service center company based in Peoria, Ill. “It’s been one of the slower sectors, but our business with them is definitely picking up.”

In the May Ag Economy Barometer taken by Purdue University and CME Group by surveying U.S. farmers, the optimism index reached 141 (anything over 100 represents optimism). The number was 16 points higher than April’s reading and the highest figure since January 2017. 

That optimism is being reflected in equipment purchases. In the Milwaukee-based Association of Equipment Managers’ monthly U.S. Ag Tractor and Combine Report, sales of tractors and combines have been climbing, both in the most recent month and for the year to date.

Moline, Ill.-based John Deere, the North American leader in the market, has seen similar gains. Sales were up 34 percent in the second quarter to $9.7 billion. “While global trade concerns weigh on farmers, overall sentiment is holding up, as commodity prices move upward and equipment demand shows broad-based improvement,” said Samuel R. Allen, chairman and CEO, at the company’s most recent quarterly conference call. 

Deere is forecasting sales in the U.S. and Canada to increase approximately 10 percent this year, while overall global sales will climb 14 percent. 

Much of those sales gains are the result of working off inventory overhangs at the dealerships. When the ag market stumbled in 2015, lots flooded with machinery.

“During the ag equipment downturn, it was harder for a farmer to do a trade-in because a lot of dealerships were just full of equipment,” says Benjamin Duyck, director of market intelligence for the Association of Equipment Manufacturers, Milwaukee. “We see that with large equipment, those inventories have been reduced at the dealership level. That pipeline is clear and farmers are confident that they can trade in again.”

“If the used side is too big, that’s going to get more play,” says Chuck Yengst, an analyst with Yengst Associates, Wilton, Conn. “If there’s too much of a price gap between the price of new and used machines, but only a small gap in the ages, you’ll have people going to the slightly used because they’re going to get a decent discounted price.”

But with better farm receipts, and buying decisions that have been put off due to softer conditions over the past few years, farmers are again ready to make a push for new machinery.

“With the anticipated profits from this year, replace vs. repair becomes a buying decision,” says DeMare. “We typically see a decline in their restock rates for parts and an increase in what they use for new equipment. We’re in the middle of that right now.”

Duyck agrees. “Farmers still need to buy replacement equipment. They’re only going to use equipment X amount of years.”

Veteran heavy equipment analyst Eli Lustgarten is less of a believer in legacy demand on the ag side. “The question of pent-up demand one is a funny one in the world of agriculture. How long does a tractor last? The answer is one more year. You never necessarily need to spend money, and modern tractors have improved reliability and improved life,” says Lustgarten, president of ESL Consultants, St. Louis. 

Still, Lustgarten says most factors are pointing toward a good year. There’s not nearly as much carryover crops in the supply chain, with corn seeing a particular decline in stocks. Additionally, weather issues in South America, most notably in the large production countries of Argentina and Brazil, are putting a dent on their forecasts.

Luke Zerby, brand marketing manager for New Holland Agriculture, says his company sees greater emphasis on ease of ownership. “We see more customers that are enjoying the rural lifestyle or farming while having a full-time job away from the farm, and with that is less time to do maintenance and more desire for equipment that is more automated and simplifies user operations.”

Moreover, the recently enacted tax reform act is good news for both equipment makers and farmers. “You are looking at government policies that favor investments. Not only tax cuts, but new depreciation rules and 100 percent write-offs,” Lustgarten says. “Things like that help. If they begin to make money, there’s some incentive to spend money.”

Duyck agrees. “I’m sure reduced taxation is a positive for the U.S. farmer, maybe not as much for the small farmer as the large farmer. And the manufacturers believe that reform is going to result in purchases of new equipment and greater capital investment.”

While crop prices have been inching upward, Duyck cautions against anticipating the figures reaching past highs. “When we talk to the USDA, they indicated that was a bubble, and we shouldn’t expect any time soon to go back to those levels of commodity prices,” he says.

There is but one thing truly threatening a bumper yield for ag equipment makers John Deere and the supply chain that serves them in the coming years: a trade war that yanks the American farmer off the soybean field and onto the battlefield. 

“Moving into 2018, our survey results still show our members are positive and optimistic about the future, but a little less than they were in 2017. There’s some uncertainty about international trade and renegotiations of major trade agreements. Tariffs are on the minds of our members,” says Duyck.  

The Section 232 tariffs announced earlier in the year, and the reactions to them, hit the ag equipment market in all directions. Few markets are more directly tied to international trade than the heavy equipment manufacturing base. Companies such as Deere and Caterpillar are truly global players, selling equipment into the world market where they compete against European and Asian makers of ag products. Raw material cost increases, such as steel, can shift the competitive balance (though the global presence of the largest players also allows them to shift production as necessary). 

Moreover, their customers are likewise intricately tied to the rest of the world. U.S. farmers, particularly of commodities such as corn, wheat and soybeans, are among the world’s most productive, and benefit tremendously from selling to NAFTA partners and beyond. 

“Any free trade agreement is important to our members,” Duyck says. “They want positive relationships with our trading partners. NAFTA is important to the industry. It’s good for our farmers and good for our manufacturers.”

The possibility of retaliatory tariffs against U.S. products is perhaps the biggest worry facing both the farming community and the equipment makers who rely on them. 

“Of the retaliatory measures, the EU has signaled they would put a protective tariff on heavy equipment, including farm equipment. And one of the threats from the Chinese was they would put a tariff on soybeans. That makes it a little challenging to get a read, but so far for the year to date the ag sector has done well,” says DeMare. 

Lustgarten says that ag products are one area where all countries should be hesitant to drag into a trade dispute. “Fighting the Chinese using ag tariffs is playing with fire. There is plenty of crop availability now, but it doesn’t change much of a hiccup to change the balance.”

Some observers are less concerned about the tariff issue. Yengst believes that farm incomes and a better business environment are much more important. “Those are the real important issues at hand, and not the tariff side of it.  

Besides the tariffs, minor drags on the forecast include rising interest rates, which will make equipment purchases more expensive. Lustgarten says 60 percent of all equipment is financed through the manufacturers. 

One other issue that plays out on the ag sector is the consumption levels for other pieces of heavy equipment. Below-ground mining, which had been moribund for several years, has taken off in the last 12 months, leading to increased demand for the massive machinery produced by companies such as Caterpillar. “Last year there were 5-10 orders of those. They’ve already built 18 this year. That diverts some of their attention away from ag equipment. They’ll always go to the bigger piece of equipment,” DeMare says. 

While the large production equipment, combines and tractors, are the bread and butter of the metals supply chain, they’re not the only piece of the agriculture pie. Small machinery, the type used by hobby farmers and homeowners, represents a significant portion of the business. Deere forecasts that business to be up about 5 percent this year. 

The more modest gains are fairly consistent with historical norms. The turf and utility side of the business does not usually experience the highs and lows associated with production ag. “Demand there tends to stay relatively stable year over year,” DeMare says. However, Duyck notes, the steady growth in the segment did provide some support to the industry during the recent downturn. 

There has been one change in the smaller machine marketplace, DeMare says, with AGCO selling more of its equipment domestically rather than its typical focus on exports. The Duluth, Ga.-based company will soon be able to supply the Mexican market from a new facility it’s constructing in Queratero. 

Despite the pressing global fears, the overall mood for the entire industry is positive. “After a few years of disaster, we’re stabilizing and seeing a turning point,” Lustgarten says.

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