On The Record: July 25, 2014
Dealers Becoming More
Cautious Heading into 2nd Half of 2014
In today’s newscast we look at the results of UBS Investment Research’s 34th Dealer Survey, an update on Western Canada’s crop and sales outlook for 2014, how the rail car shortage is impacting farmers in the Upper Midwest and Titan International and Valmont Industries second quarter results.
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I’m managing editor Kim Schmidt, welcome to On The Record. Here’s a look at what’s currently impacting the ag equipment industry.
Preliminary results from UBS Investment Research’s 34th Ag Dealer Survey suggest negative sentiment for both new and used equipment demand.
On average, dealers expect equipment demand to decline approximately 10% in 2015, with softening used equipment prices.
Currently, sales are running down about 9-10%, and UBS is predicting the pace of decline will accelerate as we move into the second half of the year.
Further, respondents indicated that corn prices below $4.24/bushel would lead to a “significant” (>10%) decline in 2014 equipment demand.
Given where commodity prices sit currently, Steven Fisher, analyst with UBS, says they are anticipating the most likely scenario is a double-digit decline in machinery sales.
Fisher says used equipment is an important part of the equation for new equipment sales. According to the survey results, dealers are becoming less willing to accept high-horsepower trade-ins.
In fact, 56% said that they are less willing to accept trade-ins vs. only 3% that are more willing. That’s up from 6 months ago when 53% said that they are less willing. Additionally, 43% said used equipment prices are weakening vs. 7% that said that they’re firming. In our last survey, 15% said that used prices were firming, so there’s a little bit of deterioration there. I think that the real challenge is that as used equipment prices weaken, it effectively gets more expensive to buy new equipment and we think that that will become more prevalent over the next year.
Fisher adds he anticipates dealers will be far more diligent with inventory management for the remainder of this year and into 2015.
Canadian Agriculture ‘Coming Back Down to Earth’
In a July 21 note, Ben Cherniavksy, analyst with Raymond James, says Western Canada’s ag markets are beginning to come back down to earth after 2013’s record crop.
He also notes that used equipment inventories remain high, which he says will keep pressure on gross margins in the near term.
Other key drivers impacting the agriculture market in Canada include: farm receipts, weather, input costs and commodity prices.
Warm and reasonably dry weather over the last 2 weeks has helped significantly improve crop conditions that were initially struggling due to excess moisture, says Cal Johnson, vice president of agriculture at Cervus Equipment, the John Deere dealership group with 19 locations throughout Western Canada.
Johnson says crop conditions in Saskatchewan are highly variable, but says it looks as though there will be an average to slightly below average crop in central and northeast Saskatchewan.
In southeast Saskatchewan and Manitoba, while crop conditions have improved significantly as things dry out, there will still be a large gap in production, he says.
Johnson adds: “2013 was the best crop in a generation over most of Western Canada. It was estimated the crop was 30% above average. Any year-over-year comparisons will be skewed because of this.”
The Raymond James report says the very aggressive sales incentives, such as attractive financing terms, generous trade-in values and volume discounts, may have caught up with dealers and flooded the market with too many machines.
As a result, despite reasonably strong farm incomes and tractor demand, equipment supply remains high.
Cherniavsky says, “We remain cautious that the near-term pressure exerted on farmers’ balance sheets will dampen equipment-buying behavior and continue to forecast 2014 sales growth of new machinery to be roughly flat for Cervus and Rocky Mountain Equipment,” the two largest dealer groups in Canada.
It’s important to note, that Raymond James’ estimates for Cervus and Rocky Mountain are slightly stronger than the North American ag sales expectations from John Deere that suggests North American ag activity will decline 5-10%.
Cherniavsky says this is due to Western Canada’s favorable exposure to the relatively healthy wheat and canola crops vs. Deere’s more corn-centric exposure.
Rail Car Bottleneck Extends to Upper Midwest
If the effect of declining crop prices wasn’t already enough to give farm equipment dealers concern about falling equipment sales, the shortage of rail cars in the upper Midwest could add to the problem.
This past spring we reported how the delays in shipping grain in western Canada was impacting farmers’ ability to get their grain to market and undercutting ag equipment sales.
Now, two university studies are putting numbers against what the shipping delays are costing North Dakota and Minnesota farmers.
A recent study by North Dakota State University found that delaying shipments of grains has already cost North Dakota farmers $66.6 million in lost sales as of May, according to a report by Prairie Business.
Another $100 million is predicted to be lost by the end of the year. The estimates only include spring wheat, corn and soybean sales.
A study by Edward Usset of the University Minnesota’s Center for Farm Financial Management estimates the rail delays cost Minnesota corn growers $72 million in lower prices from March to May, an average loss of 30 cents per bushel.
According to a report by the Minneapolis Star-Tribune, Usset puts the revenue losses at $18.8 million for soybean growers, or 40.5 cents per bushel, and $88.5 million for wheat growers, or 41 cents per bushel.
Usset’s report says the 330 million bushels of corn remaining in on-farm storage bins across Minnesota as of June 1 was worth $122 million less because of rail bottlenecks.
The remaining 9.2 million bushels of hard red spring wheat stored at farms was worth $1.7 million less.
However, lower values were less of a problem for soybean growers because there’s not much left of the 2013 crop, Usset said.
Titan International’s 2Q Net Sales Dip 11.7%
On July 23, Titan International, manufacturer of ag and industrial tires, reported its net sales for the second quarter were down 11.7%.
Net sales for the first six months of the year declined by 9.3%.
Gross profit for the second quarter was $22.6 million, or 4.3% of net sales, compared to $86.7 million, or 14.6% of net sales for the second quarter of 2013.
The company attributed the drop in gross profit and income from operations to a decrease in demand for its products used in the agriculture and mining industries.
Titan CEO and chairman Maurice Taylor says, “The farm outlook today is weak from many viewpoints, however, we believe this is a short term pause in the cycle.
"The large equipment purchases in the farming sector have declined double digits and tire prices have fallen due to lower raw material costs that we are required to pass on contractually to OEMs, which negatively impacts our financial performance.
"Inventory at dealerships remains high but is trending lower each month.”
Valmont’s 2nd Quarter Earnings Down, But Above Expectations
Valmont Industries, a provider of engineered products and services for infrastructure and mechanized irrigation equipment for agriculture, reported its second quarter results on July 17.
Sales for the period were down 4.1% vs. the same period last year, beating BB&T Capital Markets forecast for sales to drop 5.5%.
Sales in the irrigation segment fell 19%, which the company says reflects a substantial sales decline in North American markets.
“While last year’s market remained influenced by the 2012 drought and high commodity prices, this year’s outlook for a decline in North American net farm income weighed on irrigation equipment demand,” the company says.
C. Schon Williams, analyst with BB&T, says, “For the irrigation segment, the decline in North American farm income is expected to continue to impact equipment demand but VMI is still calling for flat profitability in the second half of 2014.”
Looking ahead, Valmont chairman and CEO Mogens Bay says, “In the irrigation segment, second-half demand will reflect current crop yields and how the eventual supply and demand balance impacts farm income in North America.”
And now from the Ag Equipment Archives…
Ag Equipment Archives
In 1862 Thomas Aveling, a British farmer, was dissatisfied with portable steam engines used to power farm machinery because they had to be moved from site to site by a team of horses.
To fix the problem, he develops the first self-moving steam engine.
He begins to manufacture his engines in partnership with Richard Thomas Porter, forming Aveling & Porter.
The company later became the largest manufacturer of steamrollers in the world.
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