MachineryLink

Midyear Check-Up on Equipment Sales

Jim Patrico
By  Jim Patrico , Progressive Farmer Senior Editor
Used inventories, especially combines, sprayers and large planters, are piling up on dealers' lots as sales of both new and used sag. (DTN/The Progressive Farmer photo by Jim Patrico)

For the past couple of weeks I've interviewed farm equipment company manufacturers and their dealers on the state of the industry's sales as we enter the second half of 2015. Everybody is singing the same song and it's not a perky jingle. New equipment sales have dipped by 20% or more quarter over quarter since early 2014. Used equipment inventories in some categories are too high. Most challenging categories right now are combines, high horsepower tractors, sprayers and planters -- especially large planters.

A few bright notes in the song include sales of hay and forage equipment and utility tractors. Some of that is due to the good money beef producers are now earning. After years of tightening their belts, higher prices have given them room to make long overdue equipment purchases. Some dealers also report an increase in sales of smaller equipment to hobby farmers and sundowners. A lot of those folks either disappeared when the general economy tanked, or, at least, stopped buying new gear for their 50 acres. Now that the recession has ended, they have money to spend again, and some of them have new neighbors who bought a few acres and a house and now have property to work.

The problem for the large equipment sector, of course, is recent history. High commodity prices and favorable tax incentives triggered farmers of all sizes to buy record numbers of new, more productive tech-ready machines and trade in old. What's more, the buying binge occurred across traditional demographic lines. The really big guys always buy new, but this time the second tier farmers -- who usually buy the big guys' trade-in equipment -- had enough cash on hand to also buy new instead of used. The third tier of farmers -- who almost always buy used -- didn't buy enough or didn't really need the large equipment that the larger farmers traded in. As a result, large used equipment has stockpiled. "That kind of disrupted the supply chain for used equipment," Jim Walker, Case IH's vice president for North American ag equipment sales told me. "We are dealing with that today."

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To slow the used inventory build-up, some of the dealers I interviewed said they were cutting back on roll programs because they don't want more used equipment on their lots.

Leasing is another contributor to used inventories. Walker told me leasing is attractive to producers in a time like this because lease payments are usually smaller than new equipment loan payments and look better on the balance sheet. But, he said, Case IH and other manufacturers are cautious not to expand leasing too much for fear the residual value of returned machines will be compromised due to used equipment inventories.

In the same conversation, Walker emphasized that lenders were taking a much closer look at new equipment loans. They want to see hard evidence that farmers can make the payments without stretching themselves too far.

All in all, farm equipment sales are in a bad situation, but it is by no means a crisis. Machinery companies saw this coming and have taken steps to reduce inventories of used and to produce less of new. John Deere, for instance, will change production strategies of some product lines to control new inventory. And dealers are offering discount sales on used. They have also initiated certified pre-owned programs to make used equipment on their lots more attractive to customers.

One more insight from an exec: Traditionally, dealers have a larger profit margin on sales of used equipment than on sales of new equipment. In this market, that has reversed. Now might be a good time to get your combine tuned up.

(CZ)

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