By Charlie O'Brien
AEM Senior Vice President
We certainly are in the midst of a challenging time for ag equipment sales. In certain sectors, we hear of declines of 10, 15, 20, and even 25 percent from last year’s sales. And in other sectors, especially those serving the livestock and dairy industry, I hear comments about record sales.
What does this all mean? And an even more important question: what is the new normal level of equipment sales that we can expect to see?
To gain an appreciation of the cycle we are in, we need to look at historical information. In the graph, you will see the equipment sales of 100-horsepower tractors dating back to 1996 through 2014. Although you can certainly see volatility from year to year, you will also notice an extremely positive trend line over that period.
In fact, 2013 was an all-time high for equipment sales in that horsepower category. There is no doubt that the industry has enjoyed the sales and rapid turnover of equipment in the marketplace. This jump in equipment sales was tied directly with the high commodity prices and prosperity enjoyed during this same period.
I recently read an article that suggested that the data will show that we are coming off the greatest period of prosperity in agriculture history in the United States. Of course, the moons were in alignment with not only high commodity prices, but also Section 179 of the tax code and bonus depreciation stimulating the market and accelerating equipment sales.
So was this period over the last five years normal?
Probably not normal; but also not totally out of line when we look at the long term trends. When taking a long term perspective, you will see that just 20 years ago we were selling around 15,000 tractors annually in this horsepower range. The new normal looks to be around 30,000 as we look at the trend lines.
Does this call into question our efficiency? Why do we need to sell more tractors today then we did just 20 years ago?
There are a variety of contributing factors. Farm size certainly weighs into the equation. Steadily increasing farm acres create a need for larger equipment to cover the acreage. Plus we now have knowledge of the optimum window for planting and harvesting, the majority of both taking place in a window of about two weeks.
We also need to keep pace with the technology that helps maximize efficiency and yields. After all, the challenge of feeding 9 billion people by 2050 still looms large for all of us in the industry.
So what is the new normal? When we take a historical look at the sales in January and February, we do see a decline of tractor sales in the 100 horsepower category of just over 11 percent for the year.
Is this dramatic? Well, it is dramatic in the short term. Consider if your paycheck was cut by 11 percent in a short period of time; you would certainly need to make some adjustments. It is even a little more challenging for farmers with Net Farm Income expected to drop 32 percent this year.
The market and our members have had to make some difficult short term decisions and adjustments in production. These are challenging moves to make. However, the trend lines from a long term perspective are still moving in a positive direction.
So this year may be a bit closer to the new normal, but so far continues to be well above the 10-year average.
Everyone who has a little gray hair understands that this is a business of cycles. We have just completed one of the most prosperous cycles in history for the industry. Net Farm Income has been at an all-time high and row-crop farmers have benefited from high commodity prices.
In addition to buying equipment, they have been able to pay off a considerable amount of debt. In spite of the fact that USDA forecasts a farm debt-to-asset ratio increase as noted in the enclosed financial review, the balance sheets still appear to be in very good shape. This also bodes well for the long term health of the industry.
There probably is no “normal” in this business, but we can say with certainty that the sales levels are at a considerably higher level than we saw just 20 years ago. Can we expect to see this trend continue? Well, as a very good friend once told me, “The best predictor of the future is to look at the past.” From that perspective, the long term future is still very bright for the industry.