While most market sectors around the world are still recovering from the lows of the global recession, ag machinery is a bright spot.
No doubt, companies are engineering, manufacturing and distributing equipment under new parameters, including stringent emission standards. But new opportunities, coupled with strong fundamentals, are propelling the ag machinery market forward.
“Our business has become no longer business as usual,” says Theo Freye, speaker of the executive board for Claas. “Based on a great international farm economy, we’ve tripled revenues in 10 years.”
The ag machinery industry has not been entirely immune to the effects of the global recession, though.
“The equipment markets in North America, South America and Asia are all doing well. However, Europe and Russia aren’t,” Freye says.
In the U.S., another effect of the economic woes has been more stringent requirements for credit.
“Manufacturers were affected by this, and so were the equipment dealerships seeking financial credit for wholesale orders,” explains Charlie O’Brien, vice president of agricultural services for the Association of Equipment Manufacturers (AEM).
In the past few years, there has been a shift in the balance of production and revenues for major manufacturers that make machines for both the ag and construction markets.
According to Rich Tobin, chief finan-cial officer for CNH, 65% of revenues in 2007 were from the ag market, and in 2010, 78% of revenues were from ag. In 2010, the company’s ag equipment net sales were up 12.8% in the third quarter and up 6.3% for the first nine months, which is better than the company’s early forecasts.
Optimistic projections. As ag markets rebounded in 2010, machinery makers adjusted their forecasts to be more positive.
“At the end of the third quarter, we forecast the North American market to be flat to up 5% in 2010,” says Andy Beck, AGCO senior vice president and chief financial officer. “That is an increase from where we thought we’d be at the beginning of the year.”
Industrywide year-to-date numbers for the first 10 months of 2010 show growth compared with 2009. Tractor sales increased 4.1%, and combine sales increased 5.7%. Industry leaders report that even more positive numbers are on the horizon.
“Worldwide, the order board for large tractors and combines is up 13% year-to-date,” explains Harold Boyanovsky, president and CEO of CNH. “In North America, 100-plus-hp tractors have an order board up 63%; combines, worldwide and year-to-year are up 30% and in North America are up 80%.”
John Deere is also reporting a positive outlook. The company forecasts production tonnage for the U.S. ag and turf division in the first quarter of its 2011 financial year (which began at the end of November) to be up 34%.
Overall, the resilience of the ag machinery industry can be attributed to strong commodity prices, good global demand and positive industry fundamentals. But some sectors within the industry are still lagging.
“Certain sectors like dairy, obvious purchasers of hay equipment, still have got a ways to go,” AEM’s O’Brien says. “It has come back some with improved milk prices, but it’s one of the more challenging volatile markets. Cotton was a crop we thought we might be talking about only from a historical perspective, but now these prices are indicating otherwise. In the Corn Belt, you’re seeing a lot of activity bolstering the row crop market.”
With the strong order numbers, several manufacturers are building additional production capacity. One example is Landoll Corporation in Marysville, Kan.
This fall, the company opened a new 144,000-sq.-ft. facility on 25 acres. It installed the largest tube laser in North America, one that can cut 20"-diameter steel tubing up to 46' long.
“This facility won’t be 100% tillage, but right now, a majority of its manufacturing schedule will be tillage,” says Don Landoll, founder and chairman of Landoll Corporation.
Emission regulations. With Tier 4 emission standards on the horizon, manufacturers report that customers are moving forward with machinery purchases. As the calendar flips to 2011, the next level of emission standards mandated by the Environmental Protection Agency—Tier 4 Interim for engines 174 hp and higher—will take effect.
At the end of November, John Deere officials reported that 2,500 retail orders had been placed for 8R tractors with Tier 4 Interim compliant engines.
“If you look at the greatest challenges in our industry, for many years it has been the advent of coming online with Tier 4. The industry has spent billions of dollars on research and development to come into compliance,” AEM’s O’Brien says. “Some of the companies have spent 50% of their research and development budgets on Tier 4 compliance in the past few years. These regulations are with good intentions overall, but it hasn’t come without a price.”
Manufacturers are working toward a common goal, but they are each using different technologies and strategies to meet regulations and phase the new engines into their lineup.
“For our Apache sprayers, we’ve decided to transition to Tier 4 Interim engines by model. Our 1020 model, which makes up half of our production, will transition as the compliance comes due. But for our other two models, we will use purchased credits with the government to transition those at a later date,” says Matt Hays, CEO of Equipment Technologies.
Technology push. As farmers are being asked to produce more in the same amount of time, machinery and technology will continue to become more integrated.
“Power and capacity are still decision-making aspects, but so are precision ag and ease of use because of the lack of qualified labor,” says Jim Walker, Case IH vice president of North American ag business.
Specifically, the precision ag industry is looking to new technologies to optimize resources and inputs.
“We’re focusing on how to make farmers more efficient,” says Matt Hesse, Trimble’s North American sales manager. “Today’s technology allows farmers to fine-tune many aspects of their production to become even more efficient. A hot topic with farmers has been water management.”
Distribution channel. Customers and equipment manufacturers do agree on the importance of the dealer as the connecting link.
“At the end of the day, farmers are telling us that what we need to work on is how we are developing our distribution network,” says Case IH’s Walker. “Four years ago, commercial product support was 25% of our people. Now, 75% are located in the field next to our dealers and customers.”
Many tractor segments are still showing positive growth rates; however, single-digit percent growth seems small compared with the fever pitch machinery market in 2008. When manufacturers take a look at the long term, they see a bright horizon. AEM’s O’Brien says the association sees the 100-plus-hp tractor segment up almost 17% for the year.
“Really, the best way to say it is that it’s great to be in ag right now,” O’Brien says. “There was a slight dip last year from the recession, but the reality is there is a great deal of optimism grounded in strong fundamentals. The industry is going to feed 9 billion people and the ag industry has always responded before to meet the demands it’s faced with.”