Date January 2019
- Demand is stable for both new and used equipment
- Technological advances are expected to drive new equipment sales
- Used equipment inventories remain high
- Net farm income for 2018 is expected to be down approximately 12% over 2017
By The Numbers
Equipment manufacturing demand responds to global factors: Tractor and agricultural manufacturing has experienced a significant decline in sales over the past five years. Despite favorable interest rates throughout this timeframe, declines in agricultural product prices have contributed to lower revenue for farmers leading to a reduction in new and used equipment purchases. The industry for tractor and agricultural manufacturing relies on two main customers: primarily farmers and secondarily exports. Farmers must navigate fluctuating exchange rates, consumer tastes, global food demand, and, more recently, escalating tariffs on many crops and food products. Secondarily, exports account for one-quarter of revenues in tractor and agricultural manufacturing sales. The U.S. Department of Agriculture (USDA) has forecasted approximately $11 billion of losses due to new tariffs. For example, National Milk Producer Federation economists are forecasting tariffs to cost farmers $1.10/cwt in the second half of 2018. To date we have seen decreasing commodity prices in agricultural products including dairy, soybeans, corn, wine, and others.
In response to tariffs on soybeans, fruit, and other food items, the U.S. government is planning a $12 billion bailout for farmers, but there could still be a long-term impact of lost markets and customers. New equipment prices are also rising as a result of steel tariffs. With an appreciating dollar, U.S. exports have become less competitive abroad and have driven down interest in U.S. agricultural products. These factors along with slower than anticipated growth in emerging markets have contributed to lower sales growth.
Nevertheless, crop prices are expected to increase in the coming years, which should spark renewed support for purchases of new agricultural machinery. Manufacturers should also benefit from an increase in demand from Asia and South America as those economies and populations continue to grow. Growth in revenue is forecasted to be relatively flat in the coming years despite increasing demand internationally and growing populations. Significant uncertainty around commodity pricing and how tariffs will affect prices, along with increasing interest rates and technological upgrades to improve equipment efficiency, have led to projected flat growth.
Technological changes to impact future agricultural equipment market: Tractor and agricultural machinery manufacturing has benefited from continuing technological advancements in previous years; these advancements will continue to benefit the market going forward. Manufacturers are offering more fuel-efficient products and are working to increase production efficiency through auto-steering technology, increased connectivity, and autonomous controls. While many of these technological advancements have not yet become commercially available, it shows an investment strategy by manufacturers to increase the functionality of their products to adapt to a changing farming landscape.
Used equipment backlog remains high: Used equipment backlogs reduced in 2018, but inventories are still reported to be high by used dealers and market participants. Despite favorable conditions for new equipment that should translate to purchases of used equipment, uncertainties including commodity pricing and tariffs continue to impact used sales. Dealers and manufacturers have been more aggressive with new equipment incentives and new equipment interest rates on purchases, which have also hurt used sales. Used equipment dealers are optimistic about 2019 sales and prices, which are forecast to be in line with new sales data. The market has reacted favorably to new machines and as these machines hit the used marketplace it should translate to increased sales.
Net farm income impacts equipment sales: Net farm income is a comprehensive indicator of U.S. farm profitability for all crops and livestock and includes cash receipts from farming as well as farm-related income, including government payments and non-cash items like changes in inventories, economic depreciation, and gross imputed rental income, minus cash expenses. As reported by the USDA at the end of November 2018, net farm income is forecasted to decrease $9.1 billion (12.1 percent) from 2017 to $66.3 billion in 2018, after increasing $13.8 billion (22.5 percent) in 2017. In inflation-adjusted 2018 dollars, net farm income is expected to drop $11.4 billion for the year, after increasing $13 billion (20.3 percent) in 2017. If realized, inflation-adjusted net farm income would be 3.3 percent above its level in 2016, which was its lowest level since 2002.
Farmers’ ability and willingness to purchase new tractors or combines is heavily influenced by net income. Net farm income is dependent on a combination of the price for goods produced and the cost of production. These variables include, but are not limited to, grain commodity prices, milk prices, cattle prices, cost of feed, cost of fuel, cost of fertilizer, etc. Farmers will have a negative outlook and less of a willingness to purchase new assets when commodity prices are falling and/or production costs are increasing, resulting in lower net operating income; this translates to less buying power.
Over the course of the past 25 years, not only do net farm income increases and decreases correlate with the decline and improvement in new and used equipment sales, but it also correlates with the recovery value of used equipment. Gordon Brothers maintains the largest database of used equipment transactions in the industry, and a review of the past 20 years of data of large equipment transactions indicates that used equipment prices, as a percentage of replacement cost, also rise at times of increased net farm income.