On The Record: May 2, 2014
When Might We Feel the Impacts of El Niño?
In today’s newscast we look into the likelihood of El Niño conditions hitting the U.S. and Canada this year and its impact, the possibility of legislation to permanently increase Section 179 expensing levels, what shifts in global manufacturing cost could mean for U.S. equipment exports, a rise in first quarter farm loans and financial reports from AGCO and Titan International.
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Hi I’m Kim Schmidt, managing editor. Welcome to On the Record. Here’s a look at what’s impacting the ag equipment industry right now.
Is an El Nino Event Likely?
After 4 years of La Nina like conditions that plagued much of the country with hot temperatures and drought, forecasts indicate we could be in store for El Nino conditions in the year ahead.
El Nino and La Nina are references to the changing weather and ocean conditions off of the west coast of South America that can change t he high and low pressure weather patterns across the globe.
We spoke with Ag meteorologist Elwynn Taylor from Iowa State University. He says El Nino is the friend of the Midwest farmers in the Corn Belt, bringing less extreme weather to the region.
Taylor says there’s indication of a shift toward El Nino coming out of La Nina. During these shifts we see some large changes in weather that are favorable to the Midwest, such as correction of drought conditions. When it arrives is yet to be seen.
"We do anticipate from the forecasts and the trends of things that by August there will be an El Nino condition that would be on the late side to be useful to the corn crop not arriving until then, but it would be a very favorable outlook for winter conditions of 2014 and for the crop season following 2015.
"If the El Nino is indeed in place by the end of April or May and even by the end of May then it would be a benefit to corn and soybean crops of the Midwest."
El Nino has the opposite effect in the Northwest, which experience extreme heat and drought conditions, Taylor says. California is split, with the southern portion of the state experiencing conditions much like the Midwest and Northern California seeing similarities to the Northwest.
AGCO Reports Net Sales Drop
On Tuesday, AGCO Corp. reported net sales for the first quarter of the year declined by 2.9% to $2.33 billion vs. the first quarter of 2013.
At the same time, AGCO’s North American sales grew 5.2% in the first quarter of 2014 vs. last year.
The company said elevated farm income levels in 2013 continued to support industry demand in the first quarter of 2014 — led by the dairy, protein and professional hay segments.
The most significant sales increases were in hay tools and lower horsepower tractors.
AGCO says global industry demand is expected to soften in 2014 compared to 2013 with modest declines anticipated for Western Europe and North America and more pronounced declines in South America.
Legislation Introduced on Sec. 179
On April 10 the America’s Small Business Tax Relief Act was introduced in the House of Representatives to permanently increase Section 179 expensing levels to $500,000.
The section 179 expense deduction allows business owners, including farmers, to “recover all or part of the cost of certain qualifying property” according to the IRS.
It also reduces the upfront cash cost of purchasing new and used equipment.
In other words, it gives farmers incentive to purchase new or used machinery to reduce their overall tax burden and replace older equipment.
Together with rising commodity prices during the last several years, Section 179 expensing of equipment purchases is credited with fueling the extended run of high farm equipment sales.
Nick Yaksich, vice president of government and industry relations for the Association of Equipment Manufacturers, says the bill has bi-partisan support and is likely to pass — though it likely won’t occur until after the November elections.
Again it has bi-partisan support, it’s popular, it’s just a tough political environment. If any bill is going to go in the Senate and the House with the administration’s approval there’s going to be some trade off. We don’t really have a handle on what that trade off is going to be. But with something like a tax bill, there’s usually something in there for everyone and they can find their way.
In the event it is not approved, the current law only allows for $25,000 to be expensed.
Study Shows Shift in Global Manufacturing Costs
According to a study released on April 25th by The Boston Consulting Group, manufacturing cost competitiveness around the world has changed dramatically in the last decade.
U.S. equipment is no longer as costly to produce compared to other countries, which could open doors for more exports to nations craving U.S-leading technology.
U.S. and Mexican manufacturing-cost structures have improved significantly compared to nearly all other leading exporters.
The study attributes the improvement to stable wage growth, sustained productivity gains, steady exchange rates, and a big energy-cost advantage largely driven by the 50% fall in natural-gas prices since large-scale production of U.S. shale gas began in 2005.
Mexico now has lower average manufacturing costs than China.
Overall costs in the U.S. are 10-25% lower than those of the world’s 10 leading goods-exporting nations other than China.
That said, China has a less than 5% cost advantage over the U.S.
Farm Loans Jump in Q1
The volume of farm loans saw a significant jump in the first quarter of this year compared to 2013, the Federal Reserve Bank of Kansas City said in a report released on April 30.
According to economists Nathan Kauffman and Maria Akers, operating loan volumes reached a record high, exceeding year-ago levels by 28% as farmers prepared for spring planting. The increase was driven by short-term production loans.
“Lower crop prices reduced cash flow and overall crop input costs remained high despite a moderate decline in fertilizer prices,” say the economists.
While operating loans rose, farm capital spending slowed further, lessening the need for intermediate-term farm machinery and equipment financing.
Titan International Sales Drop in Q1
On April 24, ag and construction equipment tire and wheel maker, Titan International, reported that its first quarter net sales fell by 7% and gross profit was off by nearly 44% compared to the first quarter of 2013.
Net income came in at $2.2 million vs. $19.5 million a year earlier.
Titan CEO and chairman, Maurice Taylor, said, “January and February business was weak. March improved, but could not offset the severe declines in the first two months of 2014.
Agriculture and construction seems to be improving slightly going forward but a recovery in mining looks like a long haul.”
To address the financial fall off in the period, Taylor said the company would be adjusting employment levels both in salary and hourly workforce in second quarter.
Ag Equipment Archives
Back in 1842, Joseph Dart of Buffalo, N.Y, builds the first grain elevator.
It was powered by steam and raised grain from lake boats to storage bins, where it remained until being shipped or milled. It had a storage capacity of 55,000 bushels.
Today, Buffalo has the world’s largest number of extant grain elevators. A number of historic elevators are clustered along “Elevator Alley,” a narrow stretch of the Buffalo River.
As always we welcome your feedback. You can send comments to kschmidt@ lesspub.com
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