On The Record: March 21, 2014
Impact of High Milk Prices on Equipment Sales
In today's newscast, we look at what dealers can do when manufacturers push for purity, what the conflict between Russia and Ukraine could mean for North American equipment sales, the impact high milk prices will have on equipment sales, a shift from aftermarket to OEM sales for precision equipment and the latest financial results from dealer groups Rocky Mountain and Cervus Equipment.
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In today’s episode we look at: what dealers can do when manufacturers push for purity, what the conflict between Russia and the Ukraine could mean for North American equipment sales, the impact high milk prices will have on ag equipment sales, the shift from aftermarket sales to OEM sales for precision equipment and the latest financial results from dealer groups Rocky Mountain and Cervus Equipment
I’m Kim Schmidt, managing editor. Welcome to On the Record.
Dealer Reaction to Case's Call for Brand Purity
On February 21st, we reported on Case IH’s push for brand purity during its dealer meeting earlier this year, during which the company listed 7 shortline equipment brands they want their dealers to drop.
Jeff Flora, CEO of the Southwestern Association, says they’ve received a number of calls from dealers. Some have expressed concern while others weren’t too fazed by Case IH’s dictate.
Flora noted that to this point Case IH has done nothing beyond the initial suggestion.
"Right now from my standpoint, it was a speech that was made and I wasn’t at the meeting but based on what I’ve heard from the dealers, there’s mixed emotions and different opinions by our members that I’ve talked to and again I’ve probably talked to I suppose 12-15 dealers in our territory and mixed signals from those dealers on what they heard and what they’re expectations, what they sense their expectations are from the company."
However, he says in situations like this, the topic will likely come up for dealers in every conversation they have with their territory managers.
For those who have concerns, Flora says in the states his association serves there are laws in place to protect the dealer. As long as dealers are meeting the requirements set by manufacturers, they are legally allowed to carry multiple brands.
Tensions Grow in Confilct Between Russia and Ukraine
As tension grows surrounding the conflict between Russia and Ukraine, it could spell trouble for the North American ag equipment industry.
History shows that economic sanctions seldom work. The 1980 Grain Embargo by the U.S. didn’t halt Soviet aggression in Afghanistan, but it did have a devastating impact on the whole U.S. ag industry, including dealers.
Charlie Gause, retired vice president of marketing for John Deere, estimates 50% of all farm equipment dealers in the early 1980s went out of business, including nearly 30% of John Deere dealers.
Vernon Schmidt, executive vice president of the Farm Equipment Manufacturers Association, says while the situation is different there are lessons to be learned.
"I don’t think it is the same situation but it certainly shows how things can escalate and how very unintended consequences can occur and I think agriculture is one of the first people in line to get hurt."
Schmidt adds, if there’s not enough peace in the region for farmers to plant crops, they likely won’t be buying equipment either, which will have a big impact on farm equipment manufacturers looking to expand into new markets such as Ukraine.
Impact of High Milk Prices on Equipment Sales
While corn and wheat prices are expected to fall, milk and beef prices are at record high levels.
However, it’s yet to be seen what sort of impact this could have on machinery sales.
Joseph Glauber, chief economist with the USDA, said in a speech that dairy margins are expected to stay above $8 per hundredweight for all of 2014.
Dairy product prices have been at or near record levels due, in part, to strong demand for U.S. dairy products, in particular cheese and butter.
He says dairy exports have shown remarkable growth over the past 5 years and are expected to grow further over the next 10 years.
Steer and milk prices are both forecast at record levels in 2014.
Jim Sommer, president of Service Motor Company, a Case IH dealer with 6 locations in Wisconsin, says the high prices may have little impact on machinery sales.
Most dairy operations wait to make their purchases until the end of the year, but the lack of tax incentives this year may stop some from buying equipment, he says.
The weather will also have an impact. In areas that had wet and snowy winters, it will depend on when spring planting can take place. If everything is a month behind due to the weather and late planting, Sommer says dairy farmers may be less likely to purchase machinery.
“The higher milk prices right now sounds positive, but there’s too many unknowns to make them feel good yet. Now if you asked us this question in June after the crops are in the ground and the hay is growing, they’re feeling more confident on how the year is going, the second half of the year could be good if they have cash flow, if they have extra money where they can be upgrading equipment. But, at this point in time they don’t know and we don’t know.”
Precision Equipment Companies Move Focus to OEMs
AgJunction and Raven both saw overall revenues grow in the 4th quarter of 2013.
For AgJunction, revenues for its ag segment increased by 37% vs. the 4th quarter 2012.
However, Raven’s Applied Technology segment was down 5%, due to lower after-market demand in both the U.S. and Canada.
Both companies noted a shift from aftermarket to OEM sales. 4th Quarter OEM sales for AgJunction jumped 120% vs. the same period in 2012. Raven CEO and president Daniel Rykhus says, “On the OEM front, demand continued to rise for certain products, including our advanced field computers, planter and seeder controls, boom controls and application controls.”
AgJunction CEO and president Rick Heiniger also made note of the shift, and said they are working closely with their current and new OEM partners to support the trend.
As more equipment continues to come precision equipped, it will be increasingly more important for precision farming dealers to shift their focus from equipment and hardware sales to service packages.
Rocky Mountain & Cervus Equipment 4th Quarter Results
Publicly held Canadian dealership groups Rocky Mountain Equipment and Cervus Equipment both released their 4th Quarter earnings reports during the week of March 10.
While Rocky Mountain posted a 4% gain in overall sales for 2013, its fourth quarter numbers took a hit as the dealer group focused on reducing equipment inventories and its construction equipment segment continued to falter.
Ben Cherniavsky, an analyst with Raymond James says,
“Despite the sales shortfall, the main reason for Rocky’s earnings ‘miss’ was weak gross margin performance as the chickens came home to roost with the mounting problem of inflated inventory.”
He adds: “Specifically, aggressive price discounting effected a consolidated gross margin of 11.4%, considerably below our 14.5% forecast.”
Cervus Equipment saw a 23% jump in revenues for 2013, but margin pressures pushed net profits down by 1.3% for the year.
Despite the strong sales showing, gross margins fell to 18.1% for the year from 19% in 2012.
According to the company, the decrease was primarily a result of margin pressure in the agricultural segment.
Ag Equipment Archives
And now, from the Ag Equipment Archives we go back to 1972 when Vermeer designed and introduced a modern baler to produce “big” round bales.
The first model formed a 6-foot wide by 7-foot diameter bale that weighed more than a ton.
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Thanks for watching. I’ll see you next time.