MachineryLink

Used Equipment Prices to Fall?

Jim Patrico
By  Jim Patrico , Progressive Farmer Senior Editor
If we see a lot of large-scale used equipment auctions this fall, it might be an indicator that overall prices will decrease. (DTN/The Progressive Farmer photo by Jim Patrico)

I've been researching an article on used equipment price trends for The Progressive Farmer magazine's January issue. So I was interested when an article about a recent equipment auction at a John Deere dealership in Sidney, Neb., arrived in my email box. The sale brought $7.4 million for 20 tractors, 16 combines and miscellaneous pieces such as cornheads, trucks, and sprayers. The article said 21st Century Equipment held the auction because it had an oversupply of used equipment as a result of recent acquisitions of "several other John Deere dealerships."

An auction like this is exactly what some of my interviewees predicted would happen this fall and winter. Dealers -- even those who have not recently acquired other dealerships -- have large inventories of used equipment. Some need to get that inventory off their books quickly, and auctions are one way to move equipment in a hurry.

During the last few years of high commodity prices and favorable tax treatment, farmers had money to spend on the latest and greatest new equipment, and they bought it... big time. With each purchase came a trade in. But since customers could afford new, the used equipment that came in through trade didn't move quickly, and inventories grew. That put dealers in a bind because used equipment inventories represent money not captured. It got to the point that one interviewee told me: "Dealers simply could not afford to sell as much new equipment" as they had been doing.

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Low commodity prices and the loss of some tax deductions put an end to some of those new equipment purchases. In October alone, sales of new high-horsepower tractors and combines fell by 40%, which continued a trend that started more than a year ago.

But you gotta have equipment to farm. So the obvious observation has been that farmers who needed equipment -- even in this time of low commodity prices -- would forego new and buy used. That, in turn, would create demand for used equipment and clean up dealers' inventories. If supply and demand principles work unimpeded, prices for used equipment would start out low because of the large stockpiles on dealers' lot and would rise if supplies dwindled and demand held. It hasn't worked that way yet. Prices for used equipment are competitive but not of a fire-sale nature. In part, that is because dealers want as much for their inventories as they can get and have been reluctant to lower asking prices. Strong profits from preceding years put money in the bank and allowed them to be patient.

Large-scale auctions are an indicator that some dealers' attitudes have changed. That could start a ripple effect. Since auction prices often are lower than negotiated prices, a series of large-scale auctions could make it harder for dealers to stand pat. They might have to lower their asking prices to compete for a sale. Or, they might hold an auction themselves.

If they wait too long to move inventories, a few large-scale auctions might fill much of the demand for used equipment, again leaving dealers with inventories (supply) greater than demand.

Lurking in the background of all farm equipment sales discussions are Section 179 deductions. As DTN AG Policy Editor Chris Clayton reported recently, that deduction for capital purchases such as farm equipment now sits at $25,000. Congress is discussing raising it to $500,000, which is where it sat in 2013, one of the boom years for equipment sales. If that happens, expect sales of new and used equipment to increase dramatically. One interviewee predicted more used than new sales. In fact, he thinks Section 179 could bring "a fire storm" of used equipment purchases. His rationale was that low commodity prices will continue to inhibit new equipment purchases. Farmers who need to replace equipment are more likely to snap up less expensive used equipment... and get a good deduction.

It's going to be an interesting winter for price watching.

Jim Patrico can be reached at jim.patrico@dtn.com

(AG)

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Comments

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Bonnie Dukowitz
11/14/2014 | 6:12 AM CST
Often, one overlooked fact is, if there is not a projected profit, tax incentives will make little difference in the proposed purchase.