By Bob Tita
Sales of farm equipment wilted during October, foreshadowing a long-anticipated decline in North American farm machinery demand next year.
Retail sales of farm tractors in the U.S. and Canada slipped 1.5% last month from a year ago, according to unit sales figures released by the Milwaukee-based Association of Equipment Manufacturers. Sales of high-horsepower tractors held up, rising 5% against a tough year-ago comparison. But sales of the four-wheel-drive tractors, an expensive tractor used mostly on large farms, dropped 18%. Moreover, sales of harvesting combines crashed 28% from record volumes of a year ago.
The bull market in farm machinery that began about seven years ago is gasping for air. If this really is the end, then it has been a fantastic ride for a machinery industry that was stuck in a chronic rut a decade ago.
Demand for equipment has been correlated to rising prices for corn, soybeans and other farm commodities caused by increased production of corn-based ethanol for auto fuel and rising crop exports to China and other developing nations. The drought in the U.S. corn belt in 2012 extended the price run, pushing corn to an all-time high last year at $8.31 a bushel.
Farmers flush with cash plowed it into equipment, taking advantage of generous federal tax deductions for equipment investments to reduce their taxable income. U.S. sales of new high-horsepower tractors have grown 11.4% annually since 2006, triple the growth rate between 1999 and 2005, according to the equipment association. Sales of four-wheel drive tractors, have risen about 15% annually since 2006, while combine sales have expanded 8.1% a year.
But bumper crops this year have driven down commodity prices. Corn has fallen 48% from last year’s high, shaving farmers’ incomes and making them less willing to continue buying new tractors or combines at the same pace.
“Farmers have been trading in their combines every year [for new models] and those sales rates are just not sustainable,” said Adam Fleck an analyst with research Morningstar Inc. “You’re just starting to see the used prices come down on tractors too.”
High prices for used equipment provided an incentive for farmers to trade in older equipment for the latest models, providing a catalyst for the new equipment demand. Moreover, lower used prices are likely to dissuade some farmers who need equipment from buying new machinery.
The true extent of the drop off won’t be known until next year. Some analysts predict that machinery sales in North America could fall by 12% to 14% from 2013.
Tractor and combine manufacturers Deere & Co., CNH Industrial N.V. and Agco Corp. can live with an off year. The real threat to the industry is a multi-year sales slump. That’s not likely to happen unless commodity prices retreat to the depressed levels last seen in early 2000s.
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