[Author: Tom Junge, 11.2016 | Keywords: Iowa Field Notes, State of the Industry]
Are we there yet? Weíve all been asked this before, especially when traveling by car. Iím a numbers guy. When Iím driving I often find myself calculating the Estimated Time of Arrival (ETA) in my head so I can blurt out the ETA at a momentís notice.
Unfortunately, itís not easy to estimate if ìwe are there yetî in terms of hitting the bottom in ag equipment sales. The best I can do is show you where we have been and where we are now.
State of the Industry Survey
Since dealers routinely ask how other dealers are doing, the Association decided to start conducting a State of the Industry survey in 2014. This survey compares the sales, inventory and margins from the current year to the past year. This year, results represent nearly 40% of all Iowa and Nebraska store locations.
Most would agree that 2013 was a peak year for ag equipment sales, particularly for dealers with row crop farmers as customers. The year 2014 was also good for dealers with a substantial number of cattle producers in their trade area. Since 2013, new equipment sales have dropped by nearly 50% year-to-date and used equipment sales fell 33%. New equipment sales have dropped consistently by nearly 20% per year, while used equipment sales dropped an average of 12%, with the largest drop coming in 2015.
Observations: Fewer dealers are utilizing online auctions to quickly reduce used equipment inventories. Dealers report that if used equipment is traded-in at the right price, it sells. The drop in used equipment sales should start slowing down and I anticipate new equipment sales to flatten, since dealers are ordering more new equipment to participate in manufacturer programs and, in turn, needing to move it.
Inventory reduction continues to lag behind a reduction in sales primarily due to increased inventory in 2014. Dealers were unable to cancel new equipment orders placed in 2013 and trade-ins came from equipment sold in the last quarter of 2013. The reduction of used inventory in 2015 and 2016 mirror the drop in used equipment sales. I estimate that dealers still need to reduce used equipment inventories by 12% to adjust to today’s sales. The rate of drop in new inventory is flattening.
Observations: More dealers feel comfortable with their used equipment inventory levels. A few felt more inventory adjustments were needed when local corn prices were under $3/bushel but that has subsided since harvest. Concern remains that manufacturers are loading dealers up with new inventory by enticing them to order so they qualify for new and used equipment retail programs.
Equipment Sales Margin
It’s no surprise that the equipment margin has been dropping. According to the State of the Industry Survey, total equipment margins have dropped 37% since 2013. Looking at the Cost Of Doing Business Studies, the drop has primarily come from used equipment. The margin in 2015 dropped to -.3%. The overall average for both new and used equipment has dropped from 6.1% to 4.3%.
Observations: While there is still pressure to sell equipment, dealers are getting better at bringing in trade-ins. Also, there is less used equipment being auctioned, so used equipment margins should have bottomed out. New equipment margins may suffer due to larger new equipment inventory coming to dealerships.
So are we there yet? More precisely, have we hit the bottom of ag equipment sales? Probably not. Dealers are concerned that farmers won’t have an opportunity to lock in higher commodity prices in 2016 like they did this year. According to our 2nd quarter State of the Industry survey, 50% of dealers feel conditions will be better in the second half of 2017 while 35% believe it won’t happen until 2018.
About the Author
Tom has traveled across Iowa calling on members for more than 24 years. When he’s not on the road, Tom stays busy managing both the Iowa and Nebraska Power Farming Shows. In his free time, Tom enjoys watching college and NFL football, fruit gardening and taking trips with his wife and children.