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Stalled machinery sales may drive bargains

Large farm machinery sales are slumping after years of robust growth, experts say.
Mateusz Perkowski

Capital Press

Published on February 2, 2015 11:48AM

Last changed on February 2, 2015 4:48PM

Farm machinery was on display at the recent Northwest Agricultural Show in Portland, Ore., held Jan. 27-29. Industry statistics show sales of large machinery slumping across the U.S. while demand for smaller tractors has grown.

Mateusz Perkowski/Capital Press

Farm machinery was on display at the recent Northwest Agricultural Show in Portland, Ore., held Jan. 27-29. Industry statistics show sales of large machinery slumping across the U.S. while demand for smaller tractors has grown.

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Slumping sales of large farm machinery will likely persist through 2015 or beyond, creating bargain opportunities for growers, experts say.

“It’s going to be pricing competition and financing competition, both for new and used,” said Eli Lustgarten, machinery industry analyst at the Longbow Securities investment research firm.

Apart from lower commodity crop prices reducing farm profits, the demand for new machinery is largely saturated after years of burgeoning sales, he said.

“There’s too much inventory,” Lustgarten said.

Machinery is likely to be shifted to the Northwest, where farmers are generally faring better financially than those in the Midwest who are more dependent on commodity crops, said Michael Swanson, agricultural economist for the Wells Fargo bank.

“This equipment does move around the country on flatbeds looking for the next best buyer,” he said.

The machinery industry’s growth trend sharply reversed in 2014 — unit sales fell more than 25 percent for both self-propelled combines and four-wheel-drive tractors, according to the Association of Equipment Manufacturers. Unit sales dropped nearly 14 percent for two-wheel-drive tractors over 100 horsepower.

The downward slide is expected to continue in 2015, with major manufacturers such as John Deere forecasting sales volumes to decline another 25-30 percent, said Kwame Webb, farm machinery analyst for the Morningstar investment firm.

The average age of farm machinery in North America is now unusually young, so growers aren’t motivated to upgrade, Webb said.

“Nobody has a really burning desire to buy new equipment,” he said.

The phenomenon is not limited to new machinery, either.

When commodity crop prices were soaring and farmers were buying new equipment every year, they were also trading in models from previous years, said Charlie O’Brien, agriculture sector leader and senior vice president at AEM.

That dynamic created a “log jam” of relatively late model equipment on the used market that dealers are still striving to clear out, O’Brien said.

“We were a bit of our own worst enemy there,” he said. “It still hasn’t worked through the system.”

Second-hand machinery with low hours will likely move West, away from more glutted areas, said Swanson.

The duration of the oversupply is up for debate, experts say.

The surge in commodity crop prices between roughly 2008 and 2013 is seen as an anomaly by some farm economists, as the agriculture industry has more typically contended with surpluses, said Webb.

However, a large portion of U.S. corn — which influences the commodity crop market — is now devoted to ethanol production, he said. The ethanol sector generally tightens supplies and increases price volatility, he said.

“All we really need is the right type of weather and we would all be changing our forecast,” Webb said.

Barring a major drought or other event that greatly reduces crop supplies, though, the industry consensus is that large machinery sales will further decrease in 2015, he said. Opinions vary on 2016, but Webb said he expects sales to plateau that year.

Given this outlook, manufacturers can be expected to try to stimulate sales with incentives, said O’Brien.

Recent tax measures taken by Congress are welcomed by machinery manufacturers but probably won’t boost sales, he said.

The tax deduction limit for equipment purchases dropped from $500,000 in 2013 to $25,000 in 2014, but Congress retroactively returned the limit to $500,000 in late December.

While that helped farmers who bought machinery in 2014, the action didn’t actually spur sales for much of the year, O’Brien said.

Similarly, growers are unlikely to make major machinery purchases in 2015 on the chance that Congress will again retroactively raise the tax deduction limit, he said.

The future isn’t entirely gloomy for manufacturers, since sales of small machinery offer a bright spot, according to AEM statistics.

Sales of tractors under 100 horsepower grew about 8 percent in 2014, reaching more than 170,500 units — the highest level since 2007, after which sales plummeted along with the general economy.

With consumers now more confident, they’re more willing to spend money on small tractors, said Bob Boyle, regional vice president for Northwest Farm Credit Services.

Diversified growers in areas like Oregon’s Willamette Valley, who aren’t as affected by grain prices, are also investing in smaller equipment for crops like blueberries, wine grapes and hazelnuts, he said.

“Some of the demand for smaller equipment relates to these niche markets in ag,” Boyle said.



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