Not Surprised by Equipment Mfg. Layoffs
Aug 16, 2014
Can't say I was surprised.
About John Deere's announcement Friday (August 15, 2014) regarding the layoff of 600+ manufacturing employees at various sites in the U.S. due to the slowing demand for large ag equipment. No, not surprised given the realities at play currently:
1. Sharply lower commodity prices
2. Tremendous excess of large late-model (1-4 year old) used equipment on dealer's lots all over the country, particularly 4WD tractors, combines, self-propelled sprayers and large (24-row+) planters
3. The sheer amount of new large farm equipment that has been sold over the past 8 years
Now, although I'm not surprised with these new manufacturing employment layoffs, I of course do feel for those employees. No one likes layoffs. No one. Not Deere or any manufacturer. But I think a very needed step here, again given the current realities. Point 2 in my list above is a key factor. As I've written and blogged about often here the past 15+ months, implement dealers and particularly the large dealer groups with 6, 8, 10+ stores have a real issue on their hands in terms of excess inventory on large late-model used equipment. Each of these items on their books can be listed at $200,000, $250,000, or $300,000+. That's for 1 piece of equipment. Now multiply by the 10, 20, or 30+ large tractors, combines, or planters that dealer group may have on hand. Yikes.
Deere and other equipment manufacturers know conditions for new equipment sales are directly affected by this large overhang of late model used sitting on dealer lots all over.
Time to move 'em.
So covering the auction market as I do, I'm seeing more large implement dealer inventory reduction auctions beginning to pop up, like the image above at the top of this blog, a sale bill image from a dealer inventory reduction auction this past Tuesday (August 12th) for an 11-store John Deere dealer group in eastern Iowa. We're just sitting at the beginning of this process right now.
Lots more big dealer inventory reduction auctions are coming. My sense is many dealers and dealer groups are waiting until year end 2014, hoping (like mad) that Congress will pass legislation to bump the IRS Sec. 179 business asset write off limit back up towards 2013's record high level of $500,000 for immediate write off. The current 2014 Sec. 179 business asset write off limit is only $25,000.
$25K doesn't make much of a dent in a $400K or $500K+ new tractor, combine, forage chopper, sprayer, etc.
Again, I think Deere and other manufacturers are reading this situation the right way, working to tighten up new equipment inventories. I know many dealers are happy at the tightening. One thing that wouldn't be good...for anyone...would be too much new equipment on top of too much late model used equipment.
Seen through another lens, used farm equipment values have been on the slide since 2nd Qtr. '13 after commodity prices began to sag. Here's a graph showing my Machinery Pete "Used Values Index" quarterly report. This graph for the overall farm equipment market based on all the actual auction sale price data I've been compiling now for 25 years:
See how used equipment values have been sliding lower since 2nd Qtr. '13? This has mostly been due to softening auction sale prices on those large late model grain equipment related items, so 4WD tractors, 200+ HP tractors, combines, large planters, etc.
But as I've pointed out often, here and in print in Farm Journal magazine and daily on our Machinery Pete Facebook page (www.facebook.com/machinerypete), not all auction sale prices are dropping. No sir. Auction prices have risen on used livestock related equipment here in 2014. Risen big time. Also on 15+ year old equipment in very good condition I've been seeing holding to RISING values...like this 1997 CaseIH 8940 tractor with 2,675 hours sold for a record-tying auction sale price of $92,000 on a July 24, 2014 farm auction in southeast South Dakota:
Or this 1999 JD 7810 tractor with 1,050 hours sold for a record high auction sale price of $141,000 (converts to $129,139 U.S. $$'s) on an August 2, 2014 farm auction in Ontario, Canada: