Machinery Chatter
Jim Patrico Progressive Farmer Senior Editor

Thursday 10/25/12

Equipment Sales Weather the Drought

Farm equipment dealers and manufacturers this growing season were as worried as their customers about how the drought would affect the bottom line. From their perspective, that worry may have been misplaced.

Lined up and ready to go. Farm equipment dealers and manufacturers think the drought will have a negligible effect on sales... at least for the next few months. (DTN photo by Jim Patrico)

Ross Morgan no longer thinks that the drought will hurt new machinery sales at H&R Agri-Power, a Case IH dealership with branches in north Alabama, western Kentucky and Tennessee and southern Illinois. As whole goods manager for the company, he can cite two key indicators.

One, "On our pre-orders, we have ordered the same for most products as we ordered last year. That doesn't mean we will be right. But we think we are."

Two, some of H&R's biggest customers typically roll over their equipment; that is, they trade in their one-year old machines and buy new every year. "Every one of those guys have rolled for next year," Morgan said.

His view of the new equipment market is borne out by what DTN/The Progressive Farmer heard from manufacturers this summer and fall. Jim Walker, for instance, said, "We really don't see any problems going into next year."

Walker is vice president for Case IH's North American agricultural business. "The last drought took two or three years for sales to recover. Crop insurance will make the difference this time," he told us.

Livestock and hay producers, of course, didn't have insurance against the drought and some of them were mightily hurt. Talk to manufacturers and dealers who specialize in livestock and hay equipment and you will not hear as much optimism for near-term future sales.

"It [the drought] has already affected small hay producers," Dean Morrell, AGCO marketing manager for hay and forage, said in August. "They don't have anything to cut. But a 2-inch rain could make a big difference for hay producers now."

Many of his customers also raise cattle. "Beef producers are hurt. They are culling now, rather than later," Morrell said. On the other hand, "Cattlemen are the most optimistic people there are. They are always one year from doing great."

Will they buy equipment? "No. They will probably hold off a year," Morrell said.

If you are a row-crop farmer, crop insurance was the vaccine that prevented serious sickness in the corn and soybean sector this year. That good health has extended into machinery sales.

"When we started talking to crop insurance companies, we understood a little better where things stand. And they aren't too bad," said Case IH's Walker. "For instance, a lot of farmers still have grain in the bins from last year, which is worth a lot more this year." That plays into Walker's next observation. "Fourth quarter order boards are still strong."

At Great Plains Manufacturing, maker of tillage and planting equipment, "Across our lines, you would never know anything was wrong," said Tom Evans, vice president of sales. Crop insurance will put money in farmers' pockets and that will create this question in their minds, "Pay taxes or buy something? That actually could push them to purchase new equipment," Evans said.

For some, the drought of 2012 could really be a sales motivator. Ask John Kastl, product manager at Valmont Industries, the irrigation giant. "This year has really demonstrated the value of irrigation in markets where farmers don't always think about it. They see it can be a great insurance policy. I think that will open up markets for us."

LOCATION, LOCATION

Of course, the drought didn't treat all crop farmers equally. Some were hit harder than others by the weather and did not sign up for the maximum crop insurance.

"If you look at it closely, it [the drought's effect on machinery sales] becomes a local issue," said Steve Koep, AGCO's VP, sales and operations for North America. "Did you have crop insurance? What's market price where you live? Did you opt for yield insurance or revenue insurance?"

H&R's Morgan also cited location as a key to how the drought will affect equipment-buying decisions. "Southern Illinois was hit harder that some of our other areas," he said. "They have less wheat than we do in western Kentucky, where we had an average wheat crop and then planted soybeans after. Those double-crop beans are looking pretty good now."

Local agronomic models also play into equipment purchase decisions. Tom Draper, product marketing manager for AGCO Seeding and Tillage, said, "I'm getting mixed messages from our dealers. Some farmers will want to till this fall to catch moisture from winter rains and snows. Some don't want to disturb the soil and risk losing what moisture they still have." If a grower does opt for tillage, he is more likely to be in the market for new or used equipment.

USED, TOO

Everything said of the new equipment market affects used sales.

"We have seen [used] high horsepower tractors move strongly. We don't see any hiccup on that at all," said Case IH's Walker. "Combines? That inventory has been building up even before the drought. Farmers who don't have crop insurance are normally the guys who buy into that second tier of used combines. But if they don't buy, and we continue to sell new into the fourth quarter, that inventory will probably get bigger."

That could lead to an over-supply situation, which could bring down prices for used combines and maybe affect the new combine market.

"Dealers kind of police themselves," Walker said. "And if they see inventories growing too much, they will probably stop taking orders for new with trade-ins. We don't see that yet. But that is a scenario that could slow down new combine sales."

Auction houses haven't seen a general uptick in used equipment sales. "We target dealers [wanting to unload overstock used equipment],' said Jeff Blood of Ritchie Brothers, the international equipment auctioneers. "But we haven't really seen an increase in business from them. We're still out their knocking on doors [looking for used equipment to sell.]"

LESSONS LEARNED

If crop farmers are still in the mood to buy this year and over the winter, manufacturers understand that the fall of 2013 could be another story altogether.

"A year from now is something to ponder," said Great Plains' Evans. Sec. 179 of the IRS code, which allows accelerated depreciation of equipment, could disappear; there is uncertainty about the farm bill and, "I'm extremely concerned about the crop insurance industry. What if they have to have a major change in rates? How will that affect farmers?"

Such concerns are one reason his company and much of the U.S. farm equipment industry have spent years diversifying their customer base.

"Our [U.S.] business this year is up 15%," said Luc van Herle, Kinze global sales manager. But as a hedge, his company long has had a strategy of finding new offshore customers. About one-third of Kinze's sales are now outside the U.S.

"When one area of the globe is doing badly, another is doing good," van Herle said.

Posted at 2:22PM CDT 10/25/12 by Jim Patrico
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