Roaring machinery sales to slow
Low debt-to-asset ratios, robust incomes fueled buying spree
By MATEUSZ PERKOWSKI
Farm machinery manufacturers are expecting sales to flatten in the coming year after having achieved stellar results in 2012.
Unit sales of all tractors climbed more than 10 percent in 2012, with large machines seeing the biggest surge, according to the Association of Equipment Manufacturers.
The rate of growth surpassed the expectations of manufacturers, who predicted increases of up to 4 percent at the beginning of 2012, depending on tractor size.
Farmers had very low debt-to-asset ratios and robust incomes last year, convincing them to buy machinery despite the drought, said Charlie O'Brien, agriculture sector leader for AEM.
Finances among crop growers remained in good shape due to federal crop insurance payments, he said. "They still had money they were able to use."
The association's annual survey of manufacturers indicates that they generally expect similar sales in 2013, which would be welcome, O'Brien said. "For the most part, a flat year is a good year because of the level we're at."
Unit sales of self-propelled combines declined roughly 1 percent in 2012, less than the 5 percent drop that manufacturers had expected at the start of the year.
"The bottom line is the combine market remains healthy," said Eli Lustgarten, analyst at the Longbow Research firm.
The demand for combines initially seemed to plummet more steeply than forecast, with sales down 23 percent as of mid-2012. At the time, experts attributed the decrease to an oversupply of machinery in the combine market.
In response, manufacturers curtailed production to ease the overall amount of machinery available, said Adam Fleck, farm machinery analyst for the Morningstar investment research firm.
Deere & Co. also backed away from incentives for farmers to trade in combines purchased in the last two years for newer models, intending to reduce the surfeit of used machinery on the market, he said.
The large number of combines sold in recent years could still portend a lack of demand for new machinery several years down the road if the agricultural economy stagnates and growers are less eager to buy, Fleck said.
"There's still potential for inventory overhang going forward," he said.
Machinery sales may weaken in early 2013 because farmers had expected the expiration of tax deductions for machinery purchases, Fleck said. For that reason, some sales that would have occurred this year likely got pulled into late 2012.
The amount of machinery purchases that can be deducted from taxable income was scheduled to drop from $139,000 in 2012 to $25,000 in 2013.
As part of the recent "fiscal cliff" deal, Congress retroactively raised that deduction level to $500,000 in 2012 and extended it through 2013.
Whether that change will prolong farmers' appetite for machinery remains to be seen, Fleck said.
Such tax deductions make investments in machinery easier to justify, so it certainly can't hurt, he said. "It only helps buoy the market."