Anytime you step back and look through someone else's eyes, you learn something new. To capture a view from the top of the agricultural machinery business, Farm Journal arranged exclusive interviews with several company leaders. Although manufacturers have been affected by the depressed general economy, the ag sector has been spared from the brunt of the situation.
"Agriculture has a different opportunity today than many other industries," says Doug DeVries, John Deere senior vice president, Global Marketing Services, Agriculture and Turf Division. "The fundamentals are as strong as ever—there are more people, people are eating better and there are new uses for ag products, such as biofuels."
The long-term outlook is positive, but this past year didn't keep pace with the fever-pitch market of 2008.
"2008 was an outlier, not a benchmark," says Steve Koep, AGCO vice president of sales, North America. "Machinery demand went from full throttle to near stop. And given the global economic problems, there's no safe zone to shift production to, although South America is making a recovery."
Typically, when North American markets are slow, another part of the world is doing fairly well—which prompts manufacturers to transfer volume to those areas. With most markets weak, manufacturers sought out any strength in geographic areas and moved inventory.
Across the industry, cancelled machinery orders bound for overseas markets (primarily Russia and Eastern Europe) found their way back to the U.S. "We took a look at dealer inventories early in 2009, and we slowed production very quickly. We decided we were going to conserve our distribution channel at all costs and move inventory to locations where they were selling equipment," says John Stevenson, New Holland vice president of sales and marketing for North America. He says machines in all categories were moved from coast to coast.
In response to market fluctuations, companies downshifted production to varying degrees across product lines. High-horsepower tractors, four-wheel-drive tractors, self-propelled sprayers and combines were able to maintain positive sales numbers while
decreasing volume production.
"The row-crop market is holding strong," Stevenson says. "On the flip side, midsized tractors and hay tools have been really hit. Dairies are culling herds and small dairies are closing their business. Beef prices are down."
Some in the industry think the worst is behind us.
"When you look at the livestock and dairy industries, this has been one of the bigger depressed times that we've seen," says Jim Walker, vice president of Case IH North American agricultural business. "Strengthening global demand, a weak dollar, subsidized dairy products and the recovery in the general economy are bringing those back in line to reinstate those market drivers. I think they've seen the bottom."
As they balanced supply and demand of new equipment, manufacturers kept tabs on used equipment values.
"We continue to significantly invest in modernizing our factories so we have the flexibility to ramp up or down to reflect retail demand," says John Deere's Larry Christenson, director of U.S. sales. "At John Deere, used equipment values have stayed strong, and not by accident. We put a lot of focus on managing inventories based on market requirements, and we work with our dealers to assist customers to maintain their values on used equipment."
The pre-sell programs are one way manufacturers are actively trying to plan their production schedules and zone in on machinery volume.
"One of the incentives for planned replacement is the farmer can factor in an optimized resell value and not take the full depreciation," says AGCO's Koep. "The purchasers of that used equipment are like those who purchase leased returns for cars and don't have to support the initial depreciation. The professional farmer is becoming better equipped and more open to preplanned purchase activities."
The pre-sell programs for larger ag equipment have grown in popularity as manufacturers have offered strong economic incentives for the planned purchases they use to support production forecasts.
"We're making our early orders the best offers buyers will see all year—the best discounts and newest technology going into the new year," says New Holland's Stevenson.
The push to update iron is driven by new technology.
As iron is married with electronics, manufacturers are outfitting their machines with precision ag technologies.
"One of the high priorities is integrating our equipment with the right technology," says John Deere's Christenson. "For example, our combines and sprayers are prewired for easy installation of components."
Especially with large equipment, company leaders say, matching the customer's expectations to a machine equipped with the latest technology is changing orders and service.
"Tools like guidance and telemetry are projects that we are working on for integration," says AGCO's Koep. "The equipment itself is changing from a technology standpoint. For example, CVT [continuously variable transmissions] is a technology farmers can use and automatically see benefits from to provide additional efficiency."
Technology is both embedded in machines from the factory and added on later. Manufacturers recognize that precision ag is most commonly adopted in stages.
"We have a precision land management group that is coordinated with our parts division to retrofit equipment that didn't come with or wasn't ordered with precision ag components," says New Holland's Stevenson.
The connection between manufacturer, technology, distribution and service is growing in step with the technology.
"We want to partner with dealerships, add value with our products and provide expertise in the field," says Case IH's Walker. "We say that you have to come up with a solution for each farmer. That solution may involve technology, and our quickest avenue for converting a competitive owner is proving our technology."
As dealers provide new levels of customer service, manufacturers are asking for increased commitments.
"Farmers are demanding solutions that help them reduce their costs and improve their efficiency and effectiveness," says John Deere's Christenson. "Dealers need to be able to meet the increased demand of their customer base."
Larger consolidated farms have been closely followed at times by larger consolidated dealers.
"It's a natural evolution for dealers to grow their footprint. Because of the past years of farmers righting their balance sheets, the dealer network has done that also," says Case IH's Walker. "For many, it's time to reinvest in their business or gracefully exit."
At the same time, the difference between serving the commercial farmer and the lifestyle farmer has caused friction.
"With our brand, one strategy doesn't fit all," says New Holland's Stevenson. "With our large equipment, we're seeing more dealer consolidation, which makes sense. There is an opportunity for the smaller operator and our dealers to develop relationships, which can lead to success."
AGCO's recent announcement to discontinue the AGCO brand of tractors has led to a refocus of its North American business.
"This change will be the avenue for us to consolidate and focus our resources to give our customers and our dealers a better and more productive product," says Bob Crain, senior vice president and general manager for AGCO North America. "Just as important, we are spending more dollars on research and development."
AGCO will focus its product lines and dealer networks according to brand. The Challenger brand will target the commercial farmer with a lineup that extends from midsize row-crop tractors to the largest tractors and application equipment. The Massey Ferguson brand will provide high-horsepower row-crop tractors and Gleaner and Massey Ferguson combines. Massey Ferguson will be the sole brand AGCO uses for the rural lifestyle audience, with small tractors and implements.
Moving ahead into a new year, manufacturers are positive about the future of this industry and meeting its changing demands. A positive driver for the ag market is growing global demand for ag products.
"We'll need to double food production by 2050 to meet the needs of 9 billion people in the world. To do this, we'll need to be more efficient with land, seed and other inputs," says John Deere's Christenson. "For 2010, early on we were fairly cautious, particularly coming off strong years. But in the last month of 2009, we've seen an increase in retail activity compared with the same time last year. Used combine inventory is reducing."
Although the outlook is strong, manufacturers still have the roller coaster of the recent past in mind.
"Overall, the past three years have swung and been fairly unpredictable. 2010 is shaping into one of the most clear and optimistic," says Case IH's Walker. "However, going through the year our dealers need to watch the indicators and run their business on sound predictors, but we're in this together."
As machinery demand strengthens, competitive entrants into the market have companies staying alert.
"On the compact side, we'll have another competitive year with smaller tractors, which is increased by having introductions into this market from Korea, India and China," says New Holland's Stevenson.
Just as competition is part of the industry, so are the fundamentals driving agriculture and machinery sales.
"I'm looking at the positive fundamentals and basics: increasing population, less arable land and increased protein demand," explains AGCO's Koep. "Directionally, that's what's driving ag forward. We've just hit a speed bump, and the machinery industry will grow in five to seven years to get back to 2008 levels."
More Industry Insights
Manufacturers across the industry faced challenges brought on by the economic conditions in 2009. Here's what some others in the industry have to add.
"Overall, 2009 was tough," says Rodney Miller, CEO of McCormick USA. "The market shrinking hurt us. We don't have total market penetration, so we have some overexposure, especially in dairy."
The struggling beef and dairy industries reduced sales of hay and forage equipment 25% to 30%.
"The first six months of 2009 were relatively normal, but then when it hit the brakes, it hit the brakes,"
says Mark Core, vice president at Vermeer Corporation.
The resilience of the row-crop market rang true for implement makers.
"This past spring was a good season for planter sales and things are going OK for next season," says Roy Applequist, president of Great Plains Manufacturing. "Our tillage line has been doing well also. Grain drill sales are soft because of declining wheat acreage and weather problems in Texas and Oklahoma. Land Pride sales have been slow, but that was to be expected with the problems in the general economy."
When the machinery markets gain strength, which manufacturers are optimistic about for 2010, farmers may need to be prepared to wait for production to regain its full steam.
Machinery companies are shy to build equipment without orders, and suppliers have cut their workforces and inventories.
You can e-mail Margy Fischer at email@example.com.
- December 2009