Prices might adjust as farm incomes fall
During the past four years, a common question has been, "When will the bubble burst on high used farm equipment values?" I’ve reported on machinery values and collected data for 25 years, so my answer is based on prices from nearly 1,000 auction firms.
The unbiased and unemotional reply doesn’t satisfy most folks, though. So I’ve identified six key factors that underpinned strong and rising used equipment values over the past decade. When two factors flip, we would begin to see values recalibrate. The factors are:
1. Years of strong farm income
2. High or rising prices of new ag equipment
3. Tightly controlled production of new equipment
4. Fewer machinery auctions
5. Historically low interest rates
6. Tax incentives (e.g. Section 179)
If you are a grain farmer, there’s no doubt Factor No. 1 has flipped. Profit-challenged days are upon us with the lower price of corn. Meanwhile, Factor No. 6 is up in the air. Most folks assume Congress will bump the Section 179 business asset write-off limit from a paltry $25,000 level back up toward 2013’s record $500,000 level. We’ll have to wait to see what Congress decides to do.
Factor No. 4 often is overlooked, but it is important to the trend of strong and rising used equipment values we’ve seen since mid-2004. There aren’t as many farm auctions as in the past—way fewer, in fact.
Check out the data table on this page. There were 62.3% fewer machinery auctions in the first half of 2013 compared to a decade earlier in the first half of 2003.
Also, notice how the number of machinery auctions from January to June worked steadily lower, as a whole, from 2006 through 2013. More grain farmers made good money, so fewer older farmers retired. That makes sense.
Turning the Corner. Yet the data show changes have started to appear in the marketplace of used farm equipment. Review the table below once again and notice the number of auctions that have been held so far this year. Sales volume is rising.
In late July 2014, a long-time auctioneer contact from north-central Iowa reported getting bombarded with inquiries from older farmers who want to begin discussions about having farm sales. In the month of August 2014 alone, the firm booked six nice retirement auctions.
As we start to see more machinery auctions taking place, used values could soften. In particular, this might affect large late-model used equipment worth $200,000 or more. Prices of machines in those sectors already have been soft through the early part of 2014.
The first six months of 2013 saw a record low number of machinery auctions, down 62.3% compared to auction volume seen a decade earlier in 2003. This year, machinery auctions have increased 9.8% from year-ago levels, but that’s still down 53.2% from 2004. However, first-hand reports from auctioneers say inquiries for retirement auctions are on the rise since July.