MachineryLink

Used Equipment Prices to Fall? (Part 2)

Jim Patrico
By  Jim Patrico , Progressive Farmer Senior Editor
Winter machinery auctions are starting to heat up. How many there will be is anyone's guess, as is how auctions will affect prices. (DTN/The Progressive Farmer photo by Jim Patrico)

A couple of weeks ago, I wrote a blog about used equipment prices and referenced a recent equipment auction at a John Deere dealership in Sidney, Neb. (See http://bit.ly/…)

At the time, I said it might be an indicator that dealers were planning to unload some inventory via auctions. Last week, I saw a billboard on I-70 in central Missouri advertising another dealer auction, this one in Marshall, Mo. I'm sure there are more such sales out there and wonder what they will portend for equipment prices.

"I think this winter you will see a drop in used equipment prices. I think dealers are going to have to clean their lots out," said Stan Reiss. His family runs Southwest Family Farms, which owns 13,000 acres and custom farms another 22,000 of corn, soybeans, milo and wheat.

He predicts dealers will hold large, lot-clearing auctions. Or, they might ship inventory to a large-scale auction service to attract more buyers. If such sales happen, they will throw a lot of supply into the supply/demand curve and likely will lower prices on used equipment across the board.

Not everyone is convinced many more of those market-busting auctions will occur. "That same rumor (about large sell offs) was in effect last year. It never happened," said Bill Weber, John Deere Division Manager of Remarketing.

Such auctions would not be a dealer's first plan of action, as lower used values hurt the dealer's profit and customer equity. Dealers have an incentive to clear excess inventory off the books, but they also know that auctions typically will bring them fewer dollars than negotiated individual sales. Look for them to make deals if at all possible before turning to the auction option.

This winter's equipment sales are complicated by Congress' inaction on returning to 2013 levels the Section 179 accelerated deductions on machinery, which capped at $500,000. In 2014, the cap was only $25,000, which likely contributed to slower sales. As of when this blog was written, Congress has not moved; however, with the Republicans now in control of both the House and the Senate, odds are better that the deduction cap will be raised.

That would give a boost to equipment sales, both new and used. But used sales might benefit most, said Tom Nobbe. He is president and CEO of Wm. Nobbe & Co., a John Deere dealership with seven locations in eastern Missouri and western Illinois. "Section 179 will be a really big deal for used equipment sales," he said.

Manufacturers introduced most new equipment programs months ago, and over the winter new inventories will not be very high. "So customers are likely to buy used rather than new," Nobbe said.

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Deere's Weber agrees. If Section 179 is renewed at the higher cap, there could be a large demand for used equipment, he said.

Some farmers have already tired of waiting for Congress to act. Ryan Bivens, who farms 5,400 acres of corn, soybeans and wheat around Hodgenville, Ky., last year switched from buying new to leasing machinery. Previously, he would roll combines every year and tractors and sprayers every two years. He changed that practice in 2013. "We have gone to leasing a lot of our high-dollar equipment: tractors, combines, sprayers," he said. "The main reason is that Congress kept dragging their feet on the 179 deduction and I didn't want to be stuck with a bunch of equipment with long-term depreciation. I don't keep equipment for long, and that made leasing more attractive than buying."

If Congress does not renew the $500,000 deduction, leasing could be an attractive option for more farmers.

Reiss has seen these machinery cycles before. He was a John Deere dealer for 26 years in Plains, Kan., in the southwest part of the state. Now, he and his family typically buy new equipment on a regular basis, and Reiss plans to continue the pattern.

Buying new rather than used is important to the farm's philosophy, he said. "Downtime is critical for us because we are not over-equipped or over-manpowered, which is why we have established the trend of trading every year. We find we have had little downtime because we get such good support from the dealers we work with."

Garrett Riekhof of Higginsville, Mo., farms 1,350 acres of white corn and soybeans. When commodity prices were high, he had the foresight to improve his equipment fleet: "We are kind of prepared to duck and cover and keep our equipment in good shape. That said, we will have to buy some new equipment."

By "new," he often means, "used." Some categories of equipment -- such as augers and grain carts -- are high-wear and low-cost. Those would be the first categories Riekhof would replace with new items. For other equipment, he will likely lean to used.

His combine, for instance, has 800 separator hours and is three years old. He will evaluate it this winter to decide if he should replace it. If so, "I would be looking for a low-hour combine, probably with a warranty."

He is in good shape with tractors. But down the road, "If it was going to be my main tractor, I'd probably lean toward new," he said.

New technologies have been a driver for new equipment purchases and could put the brakes on used purchases. Conversations indicate that farmers aren't likely to buy used if it means going backward on the technology timeline. So equipment several generations old could be technology orphans no one wants.

Like Riekhof, dealers and equipment manufacturers saw a drop in commodity prices looming. They knew that with also mean new sales would slow and stockpiled used equipment could drop in value. "We got pretty aggressive and got out there after the (used) business," dealer Nobbe said. "We have actually had a fairly good increase in used equipment sales. But like most dealers, we have high inventory levels right now."

Manufacturers got aggressive too. "We started focusing on the used market prior to the market softening up. Our dealers had quite a bit of growth in new sales, which generated a lot of used inventory," said Eric Lescourret, AGCO Director of Commercial Strategic Initiatives, which includes used marketing in North America.

To buffer dealers from excess inventory, AGCO in late 2013 introduced a program to inspect and warranty some late-model high-horsepower tractors and combines at selected dealerships. The idea was to motivate customers who needed a nudge. "It has been so successful, we are considering extending it to more products and dealers in 2015," said Lecourret.

Case IH had a similar program in 2014 and at this time is considering extending it to 2015.

John Deere introduced its Certified Pre-Owned program last summer. "Quite frankly, Certified Pre-Owned is in response to what is going on with commodity prices," Weber said. "It is our way to give a higher level of used equipment (next to new status) at different price point for those customers under commodity price pressure today. We wanted to put in the marketplace another alternative to stepping all the way to new."

At the same time, Weber said, "This is really driven on a technology basis too. This is an excellent opportunity for customers to upgrade their fleet and the technology they use to optimize every acre."

Certified Pre-Owned applies to 8R/8RT and 4WD tractors three years old or newer with fewer than 1500 hours and S-Series combines two years old or newer with fewer than 1,000 engine hours. They all come with a complimentary one-year JDLink subscription. They are full inspected by John Deere technicians and come with the peace of mind of a comprehensive protection plan.

Of course, if you buy at an auction, equipment might not qualify for Deere's, AGCO's or other manufacturers' certified pre-owned programs.

Jim Patrico can be reached at jpatrico@progressivefarmer.com

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GARY NASH
12/8/2014 | 1:04 PM CST
don't panic,everybody