Machinery Sales May be Level with Record 2010

Farmer Iron

Farm equipment business readies itself for a busy fourth quarter as net farm income may set another record.

Published on: September 15, 2011

Being a farm equipment dealer is no easy job figuring out what inventory - parts or wholegoods to have on hand - training a staff in the face of fast-changing technology and just keeping up with farm years that have been anything but normal in the past decade. But projected record net farm income has the industry holding its breath for a strong fourth quarter to finish 2011.

Machinery Analyst Henry Kirn, UBS Investment Research, notes that his visits to dealers recently turned up some interesting information. "Dealers generally reported flattish [year-to-date] demand vs. 2010, which many characterized as a record," he notes. Given the way crops look these days, dealers told Kirn customers were waiting to determine yields before ordering.

Dealers have to be ready, however, if the crops come in and prices stay strong because chances are good you're going to want to keep replacing equipment. Thanks to accelerated depreciation (talk to your accountant for more information), there's an incentive to keep replacing equipment.

If you're ready to travel into the dealership what will you find? Chances are used equipment prices will be higher. There's some worry over a rising inventory of used combines, which could soften prices there (potential deal?), but on the whole Kirn reports dealers told him they can manage that issue.

Industry figures from the Association of Equipment Manufacturers show North American row crop tractor sales are up 14% in August. Combine sales, however, slipped 5% year-over-year. The combine number is interesting and we'll watch to see if that number changes. Often when customers learn that new equipment is coming they'll put off replacing a machine until the newest model arrives. Deere, Case IH and Agco launched new machines this fall for season 2012.

As for those used equipment prices? AEM reports used inventories are down 5% over year-ago levels including for utility and row crop tractors. However, the number of new small tractors, four-wheel drive tractors and combines rose. Keeping an eye on those inventories is one way to determine if the industry is removing a backlog of machines from the pipeline. Fewer machines means companies can hold onto higher prices and returns (or deal tougher with you).

We're in heady times. As the chart below shows a rise in farm income mean you'll buy more new equipment. Even as frost grips Minnesota three weeks early (the heart of some great looking corn), growers will eye that new machinery; and if prices hold and yields are solid it'll be buying time.

As for dealers, they're as concerned about your crops as you are, given that a loss on your farm could be a disaster for his business. For now, strong farm profitability (overall) has the industry looking up.

After going through the Farm Progress Show and based on reports from Husker Harvest Days, it appears you're truly in a looking mood.