"Total Market Isn't Dead"
Marcia Zarley Taylor DTN Executive Editor
Mon Jun 15, 2015 08:07 AM CDT
(Page 1 of 2)

BELZONI, Miss. (DTN) -- Inventories of used ag equipment have flooded farm dealerships nationwide, with dealers and stock analysts expecting the situation to worsen before it gets better.

Used equipment inventories are escalating for dealers like Wade Litton, a general manager for 11 John Deere locations in the Mississippi Delta. (DTN photo by Marcia Taylor)

"Growers have the newest fleet of equipment in the last 40 years. They can run without high repair bills," notes Wade Litton, general manager of Wade Inc., a John Deere dealership with 11 locations in the Mississippi Delta. Well-tooled operations, combined with an abrupt collapse in grain farm incomes and uncertainty over Sec. 179 depreciation, means Litton doesn't expect equipment markets to bounce back much until 2017.

Andy Goodman, president of the Iowa-Nebraska Equipment Dealers Association, isn't surprised. Big-ticket items like combines and 175HP and up tractors have flown off the lot since 2006, with sales up 20% to 30% annually the last six years. "We've been selling 11,000 combines nationwide a year. About 7,000 is more like the true market," he said. "A lot of this reversal is related to price. $3.80 corn is a lot different than $7.50 corn." lists 10,859 John Deere used 175 HP or higher tractors for sale. Of those, approximately 60% are 2011 model year or newer and 34 are under one year old, J.P. Morgan Analyst Ann Duignan reported June 11. Another 7,617 used Deere combines are also listed for sale on the online site, with about half 2011 model year or newer. (A John Deere spokesman points out CaseIH, AGCO and other brands also carry heavy burdens, when compared to their smaller market shares.)

According to the IRON Index, which measures dealer prices and adjusts for condition, features and hours of use, March to May 2015 prices for 100 HP or higher tractors fell 3.2% year over year while combines were down 1.9%, Duignan added.

John Deere recognizes that industry used inventories have grown over the last few years but believes it is effectively managing given current market conditions, company spokesman Barry Nelson said. It has also curbed new production volumes "with a clear understanding of both market demand and the current landscape of used inventories." He points out both new and used John Deere inventories are lower than the competition, when viewed as a percent of sales.

Goodman agrees the industry's situation isn't all gloom and doom. True, his Iowa-Nebraska members represent 10% of the nation's farm sales and reported a 21% drop in new equipment sales in the first quarter of 2015, with a similar drop in used machines. But he says the livestock arena is still strong, and his members' parts sales jumped 7% and service another 10% compared to a year ago. "That's the most profitable end of the business anyway," he said. "It's not all dead."

But it's not business as usual. One casualty of the glut is offers of so-called "MUD" deals, the multi-unit discounts large operators command when they roll multiple units annually. Growers might trade as many as 12 tractors, four combines, two headers and a sprayer to guarantee sizable discounts and acquire the latest farm technology, all under manufacturer warranty. However, if dealers can't find buyers in the downstream market, they will need to curb the popular practice and possibly downsize models to make them more saleable to smaller-scale operators, dealers report.

Additional fallout could be leasing programs. Leasing has been popular during the current farm economy since it can make a farmer's balance sheet look more attractive than buying on credit. The risk to the lease holder is that residual equipment values drop more steeply than expected when the contract ends.

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