In dialog with manufacturers for this special report, it was clear that equipment supply may well get worse before it gets better. Virtually all manufacturers see more of the same continuing over the second half of 2008, or longer, including some who believe it'll last at least until mid-2009.

Hot Demand

On the demand side, manufacturers cite generation-high global demand from farm customers fueled by record net incomes, soaring commodity prices, relatively low dealer inventories prior to the market's torrid streak and the much-welcomed precipitation in many areas during the first half of the year.

"Certainly, new and good used equipment related to cash crop production will continue to be in demand for not only the next few months, but probably until the stocks start to maintain a more even level compared with demand," says Jim Allison, sales manager-grain products, Kongskilde Ltd. "For the first time in some decades, commodity prices seem to be at a point where cash crop farmers can ensure a profit."

"The industry-wide strength in demand for high horsepower tractors, harvesting and commercial hay equipment has continued to stretch the ability of manufacturers to respond in real-time to market demand," says Steve Gorsuch, AGCO. As a result, AGCO expects availability of these products for unplanned purchases will be far less than what the industry has grown accustomed to over the last decade.

Troubling Material Issues

When looking at their own operations, manufacturers (who've been burned in the not-so-distant past by overbuilding) see ulcer-causing steel prices causing a pull-back. Even worse, their component suppliers are so backed up that manufacturers couldn't deliver even if they were willing to absorb the steel hike. And then, there's still a labor shortage in many areas, even in a less-than-robust job market. In fact, one Canadian manufacturer half-joked with Farm Equipment that he'd agree to an interview in late May only if editors were willing to wield the welding torch for a shift.

America's Turn in the Ring

"The U.S. has been spoiled in the farm machinery business," says Ralph Booth, vice president of operations, Tonutti USA, Memphis, Tenn., who fully expects the tight supply situation to continue into 2009. "There has always been a huge supply, so distributors, dealers and farmers all had the luxury of waiting until the last minute to purchase. The ballgame has changed.

"Now that there is demand and better margins from other countries, things have really changed. The rest of the world has been dealing with this kind of problem for years; it's our turn now."

Eyes on the Component Makers

The run-up in demand and steel's price escalation are a one-two punch to the guts of manufacturers. "As a shortline manufacturer, our deliveries and product availability in many cases are tied to our own suppliers' availability - no matter how much planning we seem to do," says Gloria McVay, Durand-Wayland, Inc., LaGrange, Ga.

Mike Irish, vice president of sales & marketing, Brillion Iron Works, expects tight equipment supply over the next 6 months. "High steel prices are projected to continue to increase through the 3rd quarter, and steel distributors are not keeping this higher priced steel in inventory," he says.

"Specific types of alloy steels - to manufacture shanks, disc blades, c-flex bearing risers for disks, etc. - are in tight supply. Most manufacturing plants are already out 3-6 months. It's hard to increase production when leadtimes on some items are at 26 weeks. That already takes us past the manufacturing season for fall tools."

The globalization of production, especially components, is affecting availability, says Ivan Bianchi of Italy-based Berti. "More and more, the manufacturers of industry components like motors, transmission implements, tools and gearboxes are sourcing parts from different areas of the world. So this is also a factor when we talk about lead-time in general; the whole chain of machines' industry is affected."

Lee Richey, vice president of Jacto, sees no relief on the tight supply. "There is a lot of demand but manufacturers are not building large inventories this time of year. There is a cost associated with carrying inventory and with raw material costs escalating so rapidly, manufacturers need to keep costs down." With 2008 being an election year, he thinks a lot of "wait and see" will be going on through the remainder of the year.

Thoughts on Equipment Demand

"We expect the current tight supply market to sustain itself. Demand for the commodities our customers produce - in particular corn, soybeans and wheat - is high now and shows signs of continued future strength as food, fuel and fiber requirements grow. That is exacerbated by the fact that farmers' abilities to expand production are limited by the availability of land. Case IH and CNH are working to expand production to answer demand, but that also has natural limits."

- Jim Walker, vice president sales and marketing, Case IH

"We expect demand for Claas and Lexion products to continue at a high level during the next 6 months. As factors such as high commodity prices and acres devoted to row crops continue to rise or remain at their current level, machinery to harvest these fields will be in high demand."

- T.C. Truesdell, marketing coordinator CLAAS of America Inc.

"While farmers remain concerned about input costs, they'll push for maximum yields and timely planting and harvesting. Producers will focus on managing risks and marketing of products. Fixed asset depreciation will play a role also. The bottom line - retails will remain good and the 'pipeline' is empty."

– Greg Brenneman, marketing manager, Great Plains Manufacturing Inc.

Exception to the Rule
The only exceptions to extremely tight equipment supplies revealed by manufacturers were in smaller horsepower tractors and livestock-specific equipment.

"Economic concerns in the consumer and credit markets has softened demand for consumer-based spending, which in turn is postponing purchases for lower horsepower tractors and equipment," says Steve Gorsuch, AGCO. But because OEMs made attempts to improve inventory turns over the past years, he doesn't expect availability to be different from years past.

The equipment for livestock operations also makes the exception list. According to Al Goehring, marketing manager, DuraTech Industries, high steel prices are keeping sales in check, and he doesn't see a shortage unless steel prices recede or stabilize.

"We continue to get daily increases and surcharges from our steel suppliers," he says. "We can't absorb these increases in the cost of goods sold, which will cause us to take a price increase shortly. When that happens, the price of the product may cause farmers and ranchers to cut back on purchases.

"Cattlemen may react to price increases the most, as the price of beef has not had the large increases in price that the grain farmer has had. And all of the cattleman's costs are inflated with the rise of grain and feed costs and fuel, as well as land values and rent. His disposable income is shrinking at this time."

Frank O'Brien, Kuhn North America, agrees, noting that the record net farm income stems mostly from the crop production sector. The situation in the livestock sector could change the fastest of all market segments, he says. "Profit margins for crop producers appear to be more promising than livestock producers and the overall equipment demand and sales increase will likely reflect this fact."

The Other Side: From a Supplier to Manufacturers
This supplier of forged and hot-formed parts, including mower blades, sheds some light on the issues facing his firm, and his ag equipment manufacturer customers.

By Art Fultz, director of corporate sales, Beall Mfg. & Cutting Specialists Inc.

Equipment Supply. Equipment supplies will get even tighter over the next 6 months as the volatility in the multiple components comes into sharper focus. The current tightness is based on promises of delivery of bearings, blades, shanks and tubing and if one of these promises is not met, the equipment will not be available for the 2008 season. Too many variables are global in nature for the situation to get anything but worse. The factors range from steel availability to plant capacity to global demand.

When a hiccup in Australia or Africa can have immediate effects on steel availability in North America, the true impact of the terms "just-in-time" and "global" are coming home to roost this year. Just imagine what the situation would be like if autos and housing were cooking instead of in the dumpster! The auction for steel, rubber and plastic would be even crazier than it is.

All Bets Off. The market dynamics have changed to such a huge degree that there are no norms anymore. Never before have these various dynamics fallen into the current alignment and I don't see how anyone can predict the outcome. It may also be a mute point for the future as 2008 market dynamics might never be repeated and may be destined to be an "asterisk" year forever.

If there is a repeat of the panic buying that us old-timers saw back in 1979-1980 when it was common for two orders to be in the pipeline for every one of real demand, it will again take years to sort out the impact on the supply chains. Today's system of getting demand filled is so much more complicated, with no one willing to carry inventory or willing to pay the cost of carrying inventory and everyone relying on computer models that tell them what to build and when to build it. The "house of cards" is more fragile than we've ever seen before in our careers.

We have pushed the level of responsibility for availability all the way down to the level of the most basic commodities (coke and scrap to make steel, resin to make plastics, etc.) and that level is pushing back hard. For the first time, North America is being told "You can't have it, regardless of what you are willing to pay for it" and we have no business models in place to deal with that reality. Folks writing their MBA theses will have a whole new set of topics to research. They better understand the market dynamics of India and China or those theses won't be worth the paper they are written on, at least for use on this continent.

Demand & Build Forecasts. We did very aggressive pre-season forecasting, and while I shudder to think where we'd be without it, it's also apparent that these efforts still left everyone woefully short of meeting what actual demand will be in 2008. We're also seeing that the other side of the coin to "early-order" — the expectation that everything is covered and accounted for. At whatever level — end-user, dealer, distributor or OEM — there's a mindset that "the forecast/order I gave you back in October has me covered for all of 2008." There are already some very disappointed people realizing that wanting something and being able to actually take delivery in time for this season can be two different things.

There is also the realization that ordering something early did not lock in the final delivered price. While early-order solves some problems, it certainly cannot solve all of them. I hope the end-user realizes that his dealer only has a limited amount of control regarding availability in this market. If he is looking for someone to blame for shortages, it should not be the dealer, but a much higher level. Even the OEM can only take so much of the blame this time around. The market dynamics go beyond even what they can control or forecast. There may actually be laws of supply and demand, but this year will cause some of the laws to be re-examined, re-written and certainly re-interpreted. Even in hindsight, the data will be confusing. No one should be unduly criticized for lack of foresight.