Machinery sales surge in first quarter
By MATEUSZ PERKOWSKI
Contrary to manufacturer expectations, sales of tractors and combines have continued to increase in early 2013 compared to last year.
Companies surveyed by the Association of Equipment Manufacturers had forecast flattening demand in the coming year, but the group's latest statistics show unit sales rising sharply in the first quarter.
Sales shot up nearly 11 percent for two-wheel-drive tractors and 25 percent for four-wheel-drive tractors compared to last year, according to AEM. Self-propelled combine sales surged by 57 percent.
"It's been a bit surprising," said Adam Fleck, farm machinery analyst for the Morningstar investment research firm.
It's possible that demand for machinery has been "pushed forward" by tax policies, since Congress approved higher tax deductions for equipment through the end of the year, he said.
More stringent emissions standards will kick in next year, so farmers may also be buying now to avoid the higher expected machinery costs, Fleck said.
The strong uptick can be partly attributed to shaky machinery sales early last year, which makes the first quarter of 2013 look healthy by comparison, Fleck said.
However, machinery sales picked up later in 2012, so it may be difficult for manufacturers to sustain the type of growth they've seen early in 2013, he said.
Sales were strong last year during seasonal highs -- spring and early fall -- so those numbers will be tough to beat, Fleck said.
Also, the potential for higher crop stocks, softening prices, reduced subsidies, rising interest rates and expiring tax deductions adds up to a difficult headwind for manufacturers, he said.
"You're facing a farm equipment cycle in the U.S. that looks like it's ready to peak," said Fleck.
Charlie O'Brien, agriculture sector leader for AEM, said the unusual upswing in combine sales may have been caused by timing, with farmers receiving previously ordered machines during a short stretch of time.
"Part of it is pent-up demand that's just now being delivered," he said.
It's possible that manufacturers expected that farmers would be more uneasy about the lack of a farm bill, whereas their buying behavior hasn't really been affected, O'Brien said.
Congress failed to pass a 2012 Farm Bill, and extended the previous version of the legislation through September 2013.
Growers are already expecting the end of "direct payments" -- subsidies paid out for certain crops regardless of prices -- but their appetite for machinery may be diminished by a sharp reduction in funding for crop insurance, O'Brien said.
"If that's something that comes out of the next farm bill, that would be a concern," he said.
Crop prices have recently declined due to USDA predictions of higher-than-expected inventories and robust production, he said. On the other hand, better yields would help farmers, Fleck said.
"Cash receipts tend to drive equipment purchases," he said.
If crop production ends up being meager due to continued droughts, that would raise prices but concentrate income in the hands of fewer growers, Fleck said. "A lot still depends on the weather."