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Ag Equipment Report

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Farm Machinery Demand Nowhere In Sight By Dan Markham, Senior Editor The decline in commodity prices and loss of tax incentives stalled the farm machinery market in the second half of 2014. The segment’s recovery remains somewhere on the horizon. Prices for the major agricultural commodities—corn, soybeans and wheat—have declined dramatically as a result of the oversupply from the bumper crop in the 2014-15 farm year. The corresponding drop in farm receipts, coupled with other economic factors, put an end to the five-year sales boom enjoyed by North America’s makers of heavy farm equipment and their metals suppliers. The numbers tell the story. Through four months of 2015, sales of 100-plus horsepower tractors declined 16.9 percent to 9,133 units, reports the Association of Equipment Manufacturers, Milwaukee. Combine sales were hit even harder, falling 41.7 percent to 1,588 units. “It wasn’t a gradual downslope, more like a fall off the table. We were down 15-25 percent in certain categories, and that has continued this year,” says Charlie O’Brien, senior vice president and ag sector leader for AEM. In their first-quarter conference call, John Deere executives reported a similar story. “Sales were down 25 percent in the quarter-over-quarter comparison. Lower sales were recorded in all regions of the world, but the decrease was primarily due to lower shipment volumes of large ag equipment in the United States and Canada,” said Susan Karlix, manager of investor communications for the Moline, Ill.-based manufacturer of heavy equipment. While the downturn was quick, the climb back up will be much slower. “You can’t reverse that unless there’s a major turnaround in commodity prices or something else that’s going to get the farmer out of his chair. They’re very cautious and conservative buyers,” says analyst Charles Yengst of Yengst Associates, Wilton, Conn. Eli Lustgarten, senior vice president and senior research analyst for Longbow Research, agrees the bounce back won’t happen overnight. “We expect that recovery in large ag equipment will be pushed out at least 2-3 planting cycles, as corn in particular has been below breakeven levels for at least a year, creating a significant hole for farmers to dig out of once prices recover.” Commodity prices are not the only factor that has driven down demand. In 2014, the Section 179 tax code, which offered a $500,000 tax deduction, was initially cut back to $25,000, seriously dampening the incentive for farmers to purchase new equipment. The $500,000 deduction was reinstated, retroactively, in mid-December for purchases in 2014, but that has had a limited effect on the market. The larger deduction is not in effect in 2015. “You can’t plan. It’s pretty hard to make your purchase decisions throughout the year hoping something is going to happen,” says O’Brien. North America’s producers of ag equipment are among the biggest and most respected, supplying tractors, combines and other machinery all over the globe. The softness in most economies outside North America, and the strong U.S. dollar, have put a significant dent in exports. AEM reports that exports of farm machinery dropped nearly 33 percent in 2014, with all regions except Central America seeing double-digit declines. Conditions for selling equipment overseas haven’t improved much in 2015. During the boom times of the previous half decade, many farmers traded in relatively new machines for even more updated models. The large inventory of used equipment on the market will take some time to flush through the system, O’Brien says. Even if the rebound is soft, there’s hope commodity prices won’t go any lower. “We think we’re close to the bottom. We base that on USDA projections, and futures pricing has ticked up a little bit,” says Alistair McLelland, marketing vice president of North America for AGCO, Duluth, Ga. Lustgarten is not convinced the bottom has been reached. “The current weakness in farm equipment demand, both in North America and globally, is likely to persist at least through 2016 as fundamentals are not materially improved. The farm equipment market faces ongoing difficult times for the foreseeable future,” he says. Still, not all of the news is bleak. While the percentage decline is significant, the industry is coming off very high levels. Sales in 2015 are expected to hover near the 10-year average. “When you step back and look at it from a long-term perspective, there’s still a fair amount of equipment being sold,” says AEM’s Jones. The decline in other commodities may be helping. While the prices farmers are receiving for their crops are down, so are some of their expenses. The decline in oil prices has lowered their cost for fuel and chemicals, and heavy Midwestern rainfall reduces the need for irrigation. “I’m not saying it’s good. I don’t know if they’ll make a little more money or lose a little less, but it’s not as bad as it could have been,” says Richard Robinson, president and CEO of Norfolk, Neb.-based Norfolk Iron and Metals, a service center that sells to the ag equipment industry. “When you look at farmers’ balance sheets as a whole, they’re still in pretty good shape. Their debt-to-asset ratios are very low. As a result, if there’s an interest in buying equipment, I think the balance sheets would permit it,” says O’Brien. The story is much better on the livestock side of the ag market. Prices for beef, poultry and pork have held firm over the past year, as meat producers have benefited from the lower price of feed grains. “The livestock market, and the machinery related to livestock, is pretty strong right now. That’s hay equipment, baling equipment, mid-sized tractors. Those kinds of products are doing quite well,” says McLelland. Kubota Tractor Corp., Torrance Calif., which has a major presence in the smaller equipment segment, echoes those sentiments. “The market in 2014 was very good for tractors under 120 horsepower. This year we’ve seen a stronger performance in 40-120 horsepower, and a market downturn for those under 40 horsepower,” says Stephen Barcuch, Kubota product marketing director, agriculture equipment. “Cattle producers are driving the demand for utility/mid-range tractors, as well as hay equipment.” Equipment sales figures reflect regional differences. Demand continues to be solid in the livestock-heavy Northwest, and decent in the Southeast and South Central where there are more recreational farmers, say the experts. The downturn is more evident in the Midwest and Western Canada, with their emphasis on large commercial farms specializing in commodities. While 2014 offered perfect growing conditions for Midwestern farmers, and 2015 is offering more of the same, the situation is reversed in the West. California, a major farming state, remains mired in a historic drought. Thus far, the dry conditions have not taken a toll on equipment purchases there, nor has it affected the overall market the way similar conditions would in the Midwest. That’s due to California’s unique position in the ag world, specializing in fruit and vegetable production outside the primary commodities of corn and soybeans. California produces a wide variety of crops, including grapes and strawberries, tomatoes and artichokes. Most of such crops require small, more specialized equipment rather than massive tractors or combines. Though the drought has been going on for several years, Yengst says, there’s little evidence the arid conditions have cut into farm spending. That could change if the state finally begins to cut into the water available to California’s farmers. “Who gets the priority for water long-term is a concern,” says McLlelland. “You don’t produce much without water.” In general, the long-term outlook for U.S. agriculture is solid. The growing global population, and the improving quality of life in the developing world, will put a premium on food production for many years. “The fundamentals of population growth, as well as dietary changes in the Third World, drive demand. That’s why we believe the long-term outlook is strong,” he adds. The ag equipment industry continues to innovate to meet the challenges of today’s, and tomorrow’s, farmers. New technologies, such as autonomous vehicles that allow for precision farming, continue to improve production and efficiencies, and prop up demand when other factors are working against it. “There are always early adopters in the marketplace who are looking for the latest and greatest so they can get a few more dollars on their per-acre revenues or reduce costs to the bottom line,” says O’Brien. “Then that technology comes into the mainstream.” Those technological advancements will only become more critical, as the days of one farmer feeding one family are long gone. By 2020, the average farmer will be expected to provide food for 200 families, exponentially increasing the importance of efficiency gains. By all estimations, North America will remain a key player in satisfying that global demand, both as a producer of food and the machinery employed to plant and harvest it. “As global trends go, the North American farmer should be in good shape,” McLelland says.