When Northeast Iowa producer Ben Riensche looks out his office window, he sees the freshest fleet of equipment he has ever owned. Riensche, who farms 11,000 acres of corn and soybeans, has had some good years and 2010 was no exception.
“Once farmers recognize the revenue from this grain market rally into the first and second quarters of 2011, it will be hard to keep money in their pockets,” he says. “There are so many shiny new things to buy.”
Farmer confidence is at a high heading into 2011 and enthusiasm is buoyed by the profits most can project for the 2011 crop. Growers’ cash receipts should increase nearly 25% for major crops in the 2010-11 season, says Ann Duignan, an analyst with JP Morgan Chase in New York. As a result, she expects machinery buying to increase. This bodes well for manufacturers such as John Deere, CNH Global and AGCO Corporation, especially with 4% interest rates on most loans for ag machinery.
Equipment sales for large, commercial farmers was bigger than expected in 2010, says Larry Christenson, director of sales branches for John Deere Ag & Turf Division. Rising farm incomes, higher commodity prices and low interest rates are all contributing to these results, he says. “We continue to see growth with precision technology,” Christenson adds.
Tax Breaks Increase Spending. Tax benefits put in place in 2010 also are boosting farmer spending on equipment, says Paul Neiffer, a CPA with Hansen NvO who specializes in farm tax issues.
In September 2010, the Small Business Jobs Act increased the Section 179 deduction on new and used equipment to $500,000 for 2010 and 2011. The act also extended 50% bonus depreciation through Dec. 31, 2010 for all new equipment and most agricultural buildings.
The Tax Relief Act of 2010 has even more tax benefits for equipment purchases, Neiffer adds. The act allows farmers to completely expense all of their new equipment purchases after Sept. 8, 2010 and before Jan. 1, 2012. This means for 2011, all new farm equipment can be deducted when purchased and placed in service. Additionally, farmers can deduct used equipment of up to $500,000.
“When farmers are having a good year, the local farm implement dealers always seem to have a smile on their face at year-end,” Neiffer says. “This year, the smile might even be bigger with the new tax code changes.”
Sales Ahead of Emissions Rule. A push to prebuy ahead of Tier 4 Interim emission standards boosted 2010 sales for tractors and combines with engines larger than 100 hp, Duignan says. JP Morgan expects year-over-year unit sales for larger horsepower models to be up 16% for tractors and 6% for combines.
The prebuy is coupled with many farmers going forward with Tier 4 Interim compliant machines. On Dec. 1, 2010, Case IH shipped the world’s first tractor that meets Tier 4 Interim emissions standards. In November, John Deere officials reported that 2,500 retail orders had been placed for 8R tractors with Tier 4 Interim compliant engines. The smaller horsepower market is a different story, Duignan notes.
The 40-hp to 100-hp tractor market peaked in 2007, just as the economy peaked, she says. Since then, the livestock sector has undergone significant consolidation and retraction and the consumer/hobby farmer has retrenched. Demand for equipment in the segment has now fallen 60% from peak.
Duignan attributes part of the drop in sales to the fact that there is little “pent up” demand now that modern-day equipment lasts longer.
Combine sales, on the other hand, have remained strong—up 120% since the 2003 trough.
“We expect a peak in 2010 sales numbers as farmers look to lower tax liabilities at year-end and buy ahead of the emissions changes,” Duignan explains.
JP Morgan forecasts year-over-year unit sales for both smaller horsepower tractors and combines to be down 4% in 2011.
The Association of Equipment Manufacturers’ monthly report shows the sales of all tractors in the U.S. for November 2010 were up 22.6% compared with the same month last year, while combine sales were up 45.6%.
Improving Land. Riensche says he thinks many producers will next invest in improving land stocks.“With prime farmland in the Corn Belt rising an additional $2,000 an acre this year, it’s very tempting to buy new style tillage implements and land preparation tools that make your land more productive,” Riensche says. “I can see a lot of farmer dollars being spent on precision equipment.”
Top Producer, January 2011