The equipment industry builds on successful years
As manufacturers close the books on 2012 and plan for 2013, there are three key factors driving the machinery industry: the impact of the drought, farm income and the Tier 4 Final emission regulation.
It might come as a surprise, but according to historical data from the Association of Equipment Manufacturers (AEM), U.S. machinery sales have increased after large-scale adverse weather events. The chart at the right details unit sales after the 1988 and 1989 droughts and 1993 flood.
One caveat, notes J.B. Penn, chief economist for Deere, is that farmers’ fleets consist of newer equipment than in the past. However, gross cash receipts are the strongest predictor of equipment sales, he adds. Officials with John Deere and other equipment manufacturers say anticipated strong income should give farmers buying power in 2013 and crop insurance is expected to mitigate the effect of the drought on farm income.
"Cash receipts last year, 2011, were an all-time record," Penn says. "Despite the reduced output due to drought, receipts are expected to be even larger for 2012. Looking ahead to 2013, strong prices with a normal crop could propel revenues even higher to yet another record."
The one-two punch of two difficult growing seasons in a row, however, might reveal weaknesses.
"Our pre-sales are strong, but a back-to-back drought is scary to think about," says John Lagemann, senior vice president of sales and marketing for John Deere. "That would really throw a kink in the demand cycle."
John Deere isn’t alone in recounting a strong year. AGCO reported a 16% increase in net sales during the first nine months of 2012 compared with the same period the previous year. In general, the company reports, farmers aren’t changing the type or quantity of equipment they intend to purchase.
"Because of the impact of insurance, we’re not seeing the impact to our order bank or to our sales that you might expect," says Bob Crain, senior vice president and general manager for AGCO North America. "Geographically, the bright spots have been the heartland and Western Canada because they are so devoted to crops."
This historical data from the Association of Equipment Manufacturers details ag machinery sales by year, with years of natural disaster noted.
Sales momentum. Across the industry, year-to-date farm tractor sales were up 10% as of October, AEM reports. Combine sales were down less than 1%. Together, unit sales are well above the five-year average.
"It’s been a great year even though the drought put a big question mark on how it would impact the industry," says Abe Hughes, vice president of New Holland North America. "Our new combine with a Tier 4 Interim engine was well accepted in western Canada and the Midwest. One surprise was how well sales of our new Class 1 tractor, a 20 hp to 25 hp unit, went."
Machinery Executives Provide Perspective
Despite some of the endurance in the crop sector, livestock and dairy still have challenges.
"Livestock is a tough spot, and it’s one of the backbones of the New Holland business," Hughes explains. "Currently, the markets merit being separated into dairy and livestock. Dairy has been a little better, and milk prices are fairly good. But the people who have been sideswiped are the beef producers. However, beef prices have been strong. It would have been terrible if beef prices were low. Next year we see livestock getting back on its feet and leveling out."
For now, it seems that despite the unknowns surrounding those two markets, row crop equipment is supporting most machinery makers.
At CNH, net sales of equipment rose 11% in the first nine months of this year. The company reported higher unit volume than the industry for tractors and combines in the third quarter, and said that 2012 is the third year of robust demand. The company performed particularly well with tractors of 40 hp or greater, with unit-volume growth of more than 7% compared with the previous year. Sales of combines in North America remained consistent with the market, up 11%.
A second look. In 2013, the used combine market merits more attention.
"As we move forward, like the other combine makers, we will keep a sharp eye on used combine inventories," says Jim Walker, vice president of Case IH agriculture for North America.
So far, the question marks around the dynamics of the used combine market haven’t led to a deterioration in new machine sales.
"The combine market is solid—it is not necessarily growing and may contract a bit, but that doesn’t change the fact that it is solid," says Leif Magnusson, president of Claas North America. "We still see healthy balance sheets among our customers."
In the row crop market, tractors and implements might give the biggest boost.
"Tractors and implements are expected to be as strong as combines are under pressure in the overall market because of the headwinds in the used market," says AGCO’s Crain. "But I don’t see multi-unit discounts going away even though combines underpin many of those deals."
For the year ahead, manufacturers are reporting strong order books.
John Deere began its early order combine program in August. By November, production was sold out up to the third quarter. The seasonal programs for planters, sprayers, drills, air-seeding and tillage were also strong.
"Ag is a robust market—and we see a sustainable ride for the big horsepower market," says Case IH’s Walker. "We have bridged the drought hurdle and see sustained interest from farmers. Our Q1 order boards are full and we’re into Q2—our pre-sell programs didn’t suffer."
Change to come. Some of today’s momentum in the machinery market can be attributed to incoming Environmental Protection Agency emission standards. As manufacturers outfit machines with advanced (and more expensive) engines, sales tend to increase before a engine platform change.
"Tractor sales were pulled forward in 2012 by the incoming Tier 4 Interim standards. We saw increased buying before the standard was in place, which allowed lower-priced tractors," says Greg Embury, vice president of sales and marketing for Kubota.
Despite the unknowns of the drought and increased emission regulations, manufacturers are looking at agriculture with renewed strength.
"We see a renaissance for agriculture. Kubota is committed to ag and getting closer to farming and farmers. We’ll see bigger tractors in the future—up to 160 hp," Embury says.
Building on the surprising steadiness of 2012, the coming year might bring more of the same.
"Overall, we don’t see big changes compared with 2012. This assumes normal moisture for the crop farmers, but the livestock and dairy farmers are facing challenges. So together, that leaves us with a neutral outlook," says AGCO’s Crain.
Visit www.FarmJournal.com/industry_update for up-to-date sales data, including the age of the combine fleet and net cash income versus tractor sales.