By Margy Eckelkamp and Clinton Griffiths
When Jeff Thompson rolled into his soybean fields in Colton, S.D., this fall, he was extra cautious.
“My John Deere dealer told me not to combine ‘green’ beans,” he says.
The reason had less to do with maturity and more with protecting important parts on his combine. He already had one belt replaced, and the process took several weeks.
“One particular belt is almost impossible to get,” Thompson says. “They were able to source a belt that was really close, and we’re running that one, but these parts can be very hard to come by.”
Unfortunately, his story, like so many others in this post-pandemic economy, isn’t unusual.
“If you happen to be short a part you may not get it, and then you’ve got this nice, high-priced combine, and it’s just sitting,” says Tim Ostrem, a farmer in Centerville, S.D.
Supply and price issues started brewing before 2020, and then escalated as the pandemic set in. Persistent supply chain and logistical challenges have throttled the machinery industry despite elevated demand across all major markets.
“It all basically boils down to workforce, every time,” says Curt Blades, senior vice president of ag services for the Association of Equipment Manufacturers (AEM). “It’s also transportation, but that ultimately is a labor problem as well.”
ENDLESS ROLLER COASTER
Machinery executives describe the past three years as a roller coaster of labor strikes, cyberattacks, high material costs and hundreds of millions of dollars in unfinished iron.
“Expedited freight comes at a premium, and anytime we have to touch machines or move them in our factories more than once, it comes at a cost,” says Joshua Jepsen, senior vice president and chief financial officer at John Deere. “In that respect, 2022 has been a challenge given the ramp up in demand juxtaposed with a challenging supply environment.”
John Deere’s Cory Reed says from 2018 to 2022 premium freight costs alone quadrupled to hit more than $200 million combined between their sites in East Moline and Waterloo.
He says, “this was a conscious decision to get customers their products as close to on-time as we could, so we went to extraordinary efforts.”
CNH Industrial took a similar approach. “To get farmers the products they need, we have air freighted engine blocks across the ocean, for example,” says Scott Wine, the company’s CEO.
SUPPLY CHAIN GYMNASTICS
At Great Plains headquarters in Salina, Kan., James Shurts, president of the company’s ag division, says they are doing supply-chain gymnastics to keep inventory flowing to farmers.
“From my office window, I could see this sea of product stacked up that we were waiting on parts and pieces,” he says. “In the last six weeks, it’s gone.”
From a lack of semiconductor chips to tires and even hydraulic hoses, the challenges and issues have been widespread. While the situation is improving, the drag on the ag equipment market isn’t over. “It’s things you wouldn’t expect like oil filters, foam seats or weird stuff like wiring harnesses,” Blades says. “Who would have known that a good chunk of the wiring harnesses in the world come out of Ukraine.”
“It’s getting better, but there are still pockets of frustration,” Shurts adds. “Tires, wheels and rims, are areas that hadn’t been an issue, but are now bubbling up as a problem.”
STRIKES AND ATTACKS
Another manufacturing challenge has been labor strikes. This included strikes at CNH Industrial’s Burlington, Iowa, and Racine, Wis., sites.
Last year, as John Deere launched the 9R and X9 new products, the company faced labor strikes in October and November.
In late spring, AGCO experienced a cyberattack, which forced the company to prioritize sites in order to bring them back online — so some had longer shutdowns than others.
“We suspended production in the majority of our production facilities for up to two weeks during the month of May while we successfully restored our systems,” says Eric Hansotia, CEO at AGCO. “This caused our second quarter production hours to be down about 8% compared to the second quarter of 2021. We plan to mitigate this impact by increasing production over the remainder of 2022.”
JUST IN TIME NO MORE
Industrywide manufacturers have played whack-a-mole with supply chain struggles, while also gleaning new best practices in supply chain management. It’s required them to pull different levers and sometimes many levers all at once.
“It’s across the board; it’s 40 little things,” says Wine about what components are difficult to source. The company will be taking a different approach to strategic sourcing and structuring five-year strategic alliances with suppliers of choice.
Sourcing of components could vary by the day as to which the biggest issues were, says Eric Raby, senior vice president, Americas for Claas, but it was further complicated by transportation from the factory as shipping container availability and logistical complications came into play.
“Just-in-time manufacturing is fine if you can produce on time,” he says. “Sure, there were times we couldn’t produce on time, but there were plenty of times we could produce on time but not ship on time.”
These new timelines require machinery companies to have even closer communication with dealers and customers, Raby says, and to provide transparency throughout the process. Whereas in the past having visibility of what’s needed in the next 12 months for supplies was considered advanced, now 18 to 24 months of what’s on the horizon is needed.
For example, when Claas forage headers weren’t going to be delivered on time, dealers worked with customers to recondition existing units to extend use for an additional season.
LEAN MANUFACTURING
In many cases, machinery has been partially manufactured then put in a holding pattern for a final part or two. One focus for companies is to get those machines done and delivered, before creating any additional inventory of partially completed machines.
“We are a very big proponent of lean manufacturing, and you build what you need,” CNH Industrial’s Wine says.
In July, AGCO had $100 million more in unfinished inventories than the same time the year before.
Now, when machines are complete and arrive at dealers, most have been sold for months. John Deere says its supplies are allocated to their dealers for most of its product categories through model year 2023. Reed adds dealer inventories are sitting at all-time lows and his team doesn’t forecast any inventory building in size through the coming year.
AGCO’s Hansotia reports “extremely low” used inventories, and the company’s orders are ahead of normal.
“The only thing we do not have on allocation are low horsepower tractors,” Wine says. “But we will go back to a regular cadence of shipping. It’s not realistic to control supply so tightly for too long.’”
At Claas, Raby says they are trying to define unconstrained demand, as in demand without supply chain issues.
“We want to confirm price levels while our costs are going up dramatically, and we want to confirm delivery dates to address demand of dealers and customers,” he says.
THE PATH FORWARD
With a bit of a log jam and waitlist, an efficient pathway to get the latest technologies on your farm as soon as possible could be to retrofit existing machines.
AGCO intends to double the size of its precision ag division — which includes Precision Planting and Fuse Technology — by 2025.
CNH Industrial sees gains to be made since its acquisition of Raven Industries, which has a strong aftermarket footprint, as well as one of its pathways to autonomy being retrofitting existing machines.
As company leaders look ahead, they will use the lessons learned in the recent history and apply those to growing their business.
“We fully expect to produce more large ag equipment next year than we did this year,” Reed says of John Deere’s aspirations.
But, it will take time for supply and demand to equalize in the farm machinery market. Many manufacturers fought against raising prices prior to the pandemic because the farm economy couldn’t pay more, says AEM‘s Blades. But in 2023, he says, they may have no choice.
When Will Machinery Prices Soften?
For nearly two years, Greg Peterson has sounded like a broken record. The machinery market was “hot,” “hotter” and quickly became the hottest one ever, with new records set each month.
Throughout this year, Peterson, Machinery Pete founder, has continually been asked, “Pete, when will the other shoe drop with used equipment values, and how far will the values fall?”
In the past inflationary periods (when sales of new equipment took off and used values rose), Peterson says farmers banked on the strategy that commodity markets would drop, which would eventually cause lower used equipment values and better buys.
“That strategy worked because dealers always had too much used inventory stuck on their lots,” he says. “There are fewer farm equipment dealers thanks to the seismic consolidation in the past decade. The new mega dealer groups take a data programmatic approach to moving excess used inventory when the ag cycle is down.”
Expect used equipment values to soften when the ag cycle turns negative, Peterson says. “But all the data I am monitoring point toward used values not tanking 15% to 25% down as in past cycles. Used values will soften, but not crash.”
Listen to Episode 51 of the Machinery Pete Podcast, where Greg Peterson discusses when the other shoe will drop for the machinery industry.
Margy Eckelkamp, The Scoop Editor and Machinery Pete director of content development, has reported on machinery and technology since 2006.
Farm Journal Editor Clinton Griffiths is a TV newsman turned magazine editor with a passion for good stories. He believes the best life lessons can be found down a dirt road.
