In today’s episode we explore VDMA Agricultural Machinery Assn.’s 2014 outlook, the drought in the Plains, Titan’s latest financial results and an update on Section 179 legislation.
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Here’s a look at what’s currently impacting the ag equipment industry.
VDMA Expects Pause in Worldwide Sales Growth
After 4 years of growth, the ag machinery industry appears to be slowing down according to the 2014 Economic Report released by Germany-based VDMA Agricultural Machinery Association.
“Following the 7% global growth in the industry last year, we expect a decrease of 3-5% this year, although we continue to be at a distinctly high level,” said Dr. Bernd Scherer, managing director of VDMA Landtechnik, during a presentation of the 2014 Economic Report in Frankfurt on June 3.
VDMA is expecting a decrease in German industry sales of around 5% to 8 billion euros, or about $10.9 billion.
The forecast for global sales in 2014 is 93 billion euros, or $126.7 billion, a decrease of 4%.
Drought in Plains
While the California drought has captured the headlines, farmers in northwest Kansas and Nebraska are also feeling the impact from a lack of precipitation.
In fact, one farmer there, Dietrich Kastens, believes if it wasn’t for no-till practices used in the area, the region could easily have a repeat of the 1930s Dust Bowl.
As of June 10, 20.5% of the High Plains were in severe to exceptional drought, while 63.3% of the region was abnormally dry or experiencing moderate drought.
Rains that fell over the last 2 weeks brought the region up to 60% of the average moisture for the year, but over the last 36 months Kastens says they’ve lost 22 inches of rain, about the equivalent of a year’s worth of moisture.
According to Kastens, crops were planted with nearly zero soil water and it will take significant rains above the usual 10-12 inches seen during the growing season to achieve above average yields.
With three years of drought, Kastens says farmers in the area are pulling back on equipment purchases.
“I think everyone has pulled back the reigns. You’ve got to remember though that we’ve had a massive updating across the whole area from 2007-2011when money was flowing free, we were getting above average rainfall and growing a lot of bushel of high dollar crops. We had a massive updating across every farm and so guys instead of rolling equipment every year or 2 years, we’re getting back to more where we were before ’07 and that’s guys are keeping, they’re putting more acres or hours on equipment before they’ll consider trading them now.”
Ag Headwinds Pressure Titan Machinery’s Bottom Line
Titan Machinery followed through on its April 10 announcement that it would close or consolidate 8 of its stores and reduce its overall headcount to improve the performance of its construction equipment operations and counteract the slowdown in ag machinery sales.
This allowed the company to report on June 5 that it increased its overall revenues by 5.4% during the first quarter of fiscal year 2015.
Nonetheless, the company is still confronted with excess equipment inventory, declining values of used machinery, pricing pressures from new Tier 4 Final equipment and weakening ag fundamentals.
Titan’s revenue growth came largely from increased sales in the construction and international segments, which helped offset a 2.1% decline in its much larger ag equipment business during the first quarter.
Overall equipment revenues grew by 3.1%, parts sales improved by 8.8%, revenue for service operations rose by 15.9% and its rental business increased by 23.7%.
Titan management reiterated its guidance for the year, calling for revenue levels of $1.95-2.15 billion for the fiscal year, and net income of $14.8-21.1 million.
Bonus Depreciation Legislation Advances
On May 29, the House Ways & Means Committee approved legislation to make 50% bonus depreciation permanent for capital investments like equipment purchases.
The legislation was scheduled to be on the floor of the House this week.
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
The Association of Equipment Manufacturers has called on Congress to restore the expense level to its previous $500,000 level as well as make it permanent and indexed to inflation.
The group says the change in the tax rule would spur economic growth and job creation.
As we reported previously, while the bill has bi-partisan support in Congress and is likely to be passed it is unlikely that it will be passed prior to the November elections.
And now from the Ag Equipment Archives …
In a breakthrough for harvesting low-growing, fragile crops, the Hume-Love floating cutter bar and pickup reel is developed and patented by James E. Love and Horace D. Hume near Garfield, Wash., back in 1932.
The mechanisms reduce dry pea harvesting costs by 28% and crop loss from 50% to 10%. These inventions save the equivalent of 2.75 million acres of soybeans annually.
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