Shrinking profit margins for farmers could translate into dramatically lower demand for farm machinery and other big-ticket items in the next year or two.
According to a farmdoc Daily analysis by University of Illinois professor Gary Schnitkey, farm incomes in 2015 are expected to fall, leaving farmers in a financial position more similar to 2000-2005 than the more recent years of 2010-2013.
In 2000-2005, farmers spent $42 per acre on capital purchases, an expenditure that grew to a record $154 per acre in 2013, thanks to higher crop prices, tax advantages for capital investments, and the need to upgrade old or aging equipment.
But the situation is certainly changing, as shown by machinery company financials. Earlier this year, for example, AGCO reported a 27% drop in its North American sales for the first quarter of 2015.
Schnitkey suggests those sales could drop even lower. If today's farmers went back to spending $42 per acre on capital purchases, it would represent a drop of $112 per acre or 72%, according to his analysis. “Farm equipment sales, which make a large share of capital purchases, were reported down in 2014,” Schnitkey notes. “However, the decrease was not of a 72% magnitude. Therefore, further decreases are likely in 2015.”