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Farmers Rolling in the Green Ethanol production and other developments in alternative energy, coupled with strong demand for traditional crops, is keeping farmers busy—and in the market for new equipment. For generations, the success of America’s agricultural industry has been built on two Fs: food and fiber. Farmers grow food, either for direct consumption by the population or to feed livestock, and they grow fiber for use in clothing and other vital materials. In more recent times, a third F has entered the mix—fuel—as the nation seeks new alternative forms of renewable energy. Combined, these three essential needs account for the strong ag—and ag equipment—market that producers report today. “We do not, and the people we follow do not, anticipate a change in the fundamental market drivers of food, fuel and fiber,” says Bill Preller, senior director of specialty business for Case IH, Racine, Wis. “With stability in that arena, you have stability in the ag commodity business—soybeans, wheat, you name it.” Stability in commodity prices means American farmers are making money. When farmers have money, farmers buy tractors, combines and other pieces of steel-intensive heavy equipment. “Fundamentally, our business is driven by net farm income,” says Todd Stucke, director of marketing for hay and harvesting for Agco Corp., Duluth, Ga. “When net farm income is strong, in whatever segment, it usually is reflected in equipment sales. And we’ve been blessed with strong commodity prices.” Like other industries, farming was hurt by the recession, although the decline was more modest and the rebound far more robust. In the United States, net farm income in 2011 topped $100 billion for the first time. That number is expected to dip in 2012, but still remain well above historical norms, according to the U.S. Department of Agriculture’s Economic Research Service. The early signs bear that out. “It’s not as strong as it was a few months ago, since we’ve seen a little lull in the economy,” says Richard Robinson, president of Norfolk, Neb.-based Norfolk Iron & Metal, a supplier to the ag equipment market. “But it’s still stronger than the rest of the economy.” Gerald Brockman, vice president of sales and marketing for O’Neal Steel, Birmingham, Ala., also sees demand from equipment customers flattening over the next 6-12 months. “Most OEMs expect gradual increases in production in 2013,” he adds. CNH, Case IH’s corporate owner, anticipates some modest growth this year, with total global (and North American) ag equipment sales up 5-10 percent. Through the first quarter, equipment sales were up 18 percent compared to 2011. “It’s not a huge bump, but it is continued strength in an already strong market,” Preller says. In its May Flash Report, the Association of Equipment Manufacturers reported that total farm tractor sales in May (including both two- and four-wheel drive models) were up 12.7 percent to 19,457 units, while larger models alone were up 5.4 percent to 430 units. Total tractor sales through the first five months of the year were 6.9 percent ahead of the same period in 2011 at 72,019 units, though sales of the larger four-wheel drive models were slightly behind last year’s pace at 2,368 units. Combine sales, in contrast, were down 33 percent through May to 2,421 units. “That’s more an indication of market saturation,” says Charlie O’Brien, vice president of agriculture services for Milwaukee-based AEM. “Everybody’s got newer equipment in the field, so there’s not the demand there once was.” On the food side, the chief fundamental strength is in the developing world. Countries around the globe are leaving the third world behind, and the first step in that journey is an improved food supply. “Demand growth, now and in the future, is because of the developing countries. They’re looking for more meat and milk in their diets, and that means more grain and equipment to harvest it,” says AEM’s O’Brien. The desire for improved sources of food benefits the United States in several ways. The U.S. is already the most efficient agricultural producer in the world, and thus enjoys a healthy market for its exported goods. Moreover, nations looking to provide for themselves need the tools to become more efficient producers. “Arguably the best farm equipment in the world is being made in the United States, technologywise, conveniencewise and life-cycle wise,” says Bill Hickey, president of Lapham-Hickey Steel, Chicago. Experts are confident that the political and economic stability in the United States, relative to the widespread instability in other parts of the world, ensures that demand for American agricultural products and machinery will remain high for the foreseeable future. On the alternative energy front, work continues to turn crops, or crop byproducts, into sources of power. Whether its biodiesel from soybeans in the Midwest or ethanol from sugar cane in the Southeast, the possibilities are many for a country (and a world) starved for fuel. While ethanol’s emergence was aided greatly by government subsidy, Preller says, the industry is now ready to stand on its own. “The true market fundamentals of ethanol as a viable fuel are solid, and it’s going to continue to support growing crops as a fuel source.” “The trend we’re seeing is the demand for residue,” adds Stucke. “We’re seeing some cellulosic ethanol plants coming about, and their raw feed stock is residue, either corn fodder or switch grass.” These new fuel sources may pose different challenges to the equipment manufacturers than the original ethanol production. “The majority of ethanol is produced from corn, and corn production and the equipment required for it is already a core competency,” says Preller. Use of unconventional feed stocks may result in the need for different types of equipment, or for existing equipment to do more. But that’s nothing new. As in other industries, the equipment manufacturers are in the middle of a technological revolution, with new developments to improve farming being announced regularly. One example is telematics, in which the tractor or combine sends diagnostic data back to a central office, allowing farmers to identify potential equipment trouble before it becomes a major issue. Other developments help farmers improve logistics, map yields and even operate vehicles with no driver using GPS technology. “Isobus is the biggest buzzword right now,” says Paul Williams, project manager for Kubota, a small tractor specialist. While most modern farm equipment is governed by onboard computers, the isobus connectivity allows pieces of machinery to communicate with each other—a grain wagon telling a combine when it is full, for example. The biggest hurdle is getting this kind of integrated performance across different brands of equipment, Williams says. One area every equipment manufacturer has been working extensively is engine efficiency. As with other industries that rely on internal-combustion driven machines, the ag industry is faced with daunting new emissions restrictions. In January, Tier 4 Interim requirements were put in place, with Tier 4 Final requirements expected by 2014. The new air-quality standards are a mixed blessing for the industry. While it will lead to cleaner-burning engines, it also will add to their cost, say equipment vendors. Case IH sees the new requirements as a marketing opportunity. Preller says the company has developed a new unit that is compliant on emissions while being 10 percent more fuel efficient than its predecessors and its competitors. “We’re going to continue to use the same technology going into the Tier 4 Final that rolls over in the next few years. It’s nice when you can do environmental good work and economic good work,” he adds. Environmental regulation is not the only area where the federal government influences the agriculture market. The industry is anticipating congressional adoption of a new farm bill that contains some major changes, including changes to subsidies and direct payments to farmers. “The expectation is the direct payment will be gone. Our position is to make sure there’s a safety net when it’s needed. That’s crop insurance,” says O’Brien at the equipment manufacturers association. Last year’s drought in Texas is an example of why insurance is needed. Farmers there lost all their crops and had to get rid of their cattle. Without farm insurance, they’d be looking for a new line of work. “If you don’t have a safety net to provide some protection, you could put farmers out of business. And that takes food production out as well. To have a safe and plentiful supply of food, you need to protect your farmer in the event of a catastrophic incident,” O’Brien says. Given the current favorable weather and economic conditions, production of farm equipment is booming. In fact, in some areas it is being constrained by the supply chain. Some components that go into farm machinery, such as tires, are close to being “tapped out” as their makers work at full production, Preller reports. “It’s in line, but we’re not going to have dramatic growth. We’re utilizing the supply chain capacity that exists.” As problems go, that’s not the worst one to have, which is one reason Preller and others are so optimistic. “The real question for your readers is are these equipment manufacturers going to continue to use steel?” he asks. “The answer is yes.”