In today’s newscast we look at some results from Ag Equipment Intelligence’s “2015 Dealer Business Outlook & Trends” survey, Morningstar’s outlook on biofuels, Titan Machinery’s plans for inventory reduction and how dealers are shifting their precision farming priorities in 2014.
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Is the Biofuel Supercycle Over?
Hi I’m Jaime Elftman, assistant editor, sitting in for Kim Schmidt, who is on maternity leave. We’re happy to report Kim had a baby boy on September 11.
Welcome to On the Record. Here’s a look at what’s currently impacting the ag equipment industry.
Falling Equipment Revenues
Nearly half of North American farm equipment dealers are expecting that their new equipment revenues this year will be lower compared to 2013.
Of the 300 dealers who responded to Ag Equipment Intelligence’s “2015 Dealer Business Outlook & Trends” survey between August 25 and September 12, 48.4% say their new equipment sales will go down from 2% to more than 8% for the year.
Slightly over one-third of the dealers, or 34.4%, expect new equipment sales to be up by at least 2% vs. 2013. Another 17.2% say sales revenues will come in at about the same level as the previous year.
Breaking the responses down, 11.2% are forecasting that revenue from 2014 new equipment sales will be 8% or more above that of 2013; and 23.2% say sales will be between 2-7% higher than last year. On the downside, 23.2% are expecting revenues for all of 2014 will come in between 2-7% lower than the previous year, while the largest percentage, 25.3% project full-year sales will decline 8% or more for the year.
Is the Biofuel Supercycle Over?
According to the independent investment research firm Morningstar, during the past decade Deere and AGCO’s share prices have appreciated an impressive 170% and 189%, respectively, compared to the S&P 500’s 76% gain. Deere and AGCO have also grown their revenue at 10% and 12% compound annual growth rate, respectively, which has been much faster than the 6% annual global agricultural machinery market growth.
In a new “Industrial Observers” report, Morningstar equity analyst Kwame Webb, says much of this growth in demand is the result of growing per capita calorie consumption, shrinking agricultural workforces, and surging demand for biofuel crops.
Since 2003, biofuel has grown to consume 37% of incremental global crop production. Over the next decade Webb expects the portion of crop production dedicated to renewable fuels to plateau and to slow the growth in farm equipment sales, as well.
“The seminal issue here is that over the last decade, ethanol production in the U.S. has grown more than 15% per year and it’s well known that this is being driven by the blenders credit by the EPA.
"Now we’re finally at that 10% level the EPA wanted us to get to and they’ve really decided that we’re not going to push to the 15% level anymore, so the real driver of ethanol demand going forward is really just going to be how much U.S. consumers are driving cars. Gasoline consumption has really only gone up 0-1% per year, so really that’s the outlook for ethanol, which has driven so much crop demand and driven so much demand for ag equipment over the last decade.
"Outside the U.S., ethanol demand will be a little bit more robust. The Brazilians are clearly driving more miles than us, they’re buying more cars than us, but in the U.S., as far as the ethanol story is over. The great growth is behind us. We’re probably going to peak at about 92 million acres as farmers look to repurpose that acreage into more profitable crops.
"So what does that mean for ag equipment demand? BBMA says that ag equipment spent has probably grown at about 2 times what global crops have done. Global crops have grown 3%. Ag equipment’s grown 6%. I think if you look at that multiplier for the U.S., U.S. ag equipment sales are probably only going to grow 1-2% and probably globally, ag equipment demand will grow 3-4% over the next decade. Albeit, 2014-2015 will be below trend.”
Titan Machinery Reports Q2 and 6 Month Financial Results
Last week, Titan Machinery reported its second quarter and six month earnings for fiscal year 2015. While the dealer group says it continues to face headwinds in its agriculture segment, David Meyer, chairman & CEO, told Ag Equipment Intelligence that the company is on track with its targets of reducing equipment inventories by $250 million and increasing cashflow. The company also announced the acquisition of a Case IH dealership in Wayne, Neb.
During the conference call with analysts, Mark Kalvoda, Titan CFO, reported that the company ended the second quarter with equipment inventory of $996.3 million. He said, “Our second quarter ending inventory is up slightly, which is consistent with our expectations stated on our last call. As a result of our equipment inventory reduction plan this year, we are modeling a decrease in our third quarter inventory level compared to last year’s third quarter inventory increase.
“To achieve this year’s target we have reduced our current orders for equipment from suppliers by approximately $400 million compared to this time last year. This is the primary driver of our inventory reduction in the back half of this year.”
Kalvoda also forecast cash generation from operations for the current fiscal year of $50-$70 million. “Our planned decrease in inventory and expected increase in cashflow over the second half of the year will continue to strengthen our financial position with our lenders,” he said.
Now here’s technology editor Jack Zemlicka with his latest report from the Technology Corner.
Technology Corner: Dealers Shifting Precision Farming Priorities in 2014
With a projected decline in farm equipment sales along with lower commodity prices, precision farming dealers aren’t immune to the effects these trends will have on sales of technology products. At the start of this year, some dealers forecast hardware sales to remain flat or decrease, underlining the importance of developing alternative, sustainable revenue sources.
While hardware still bolsters the bottom line for many precision dealers, the 2014 Precision Farming Dealer benchmark study reveals a movement during the last year toward expanded service offerings, to include data management.
Respondents say 57.5% of their precision revenue comes from selling hardware, down slightly from 62% in 2013. The most significant revenue growth came in the areas of service/support sales, from 13.7% in 2013 to 18.9% this year, and data management, from less than 1% last year to 6.8% in 2014.
Although still small percentages compared to hardware sales, precision service and data management are emerging revenue opportunities dealers will likely continue to incorporate. However, unlike hardware, these areas are still relatively undeveloped in terms of a proven model that guarantees a financial return for the dealership.
We also asked dealers to identify from a list of 10 service offerings, which ones they offer, and for all but one — remote service, which was new to the study this year —the percentages increased over 2013. The biggest jump was in data management, with the percentage nearly doubling year-to-year. Only 32.2% of dealers offered data management service in 2013, compared to 63.4% this year.
As some dealers move toward being a “one-stop shop” for data management service, it was no surprise that related services also saw significant increases, including GPS/RTK signal subscriptions, yield monitor calibration, soil sampling and seed and fertilizer recommendations.
The overall increase in service offerings reinforces the significance dealers are placing on these areas to distinguish themselves from the competition and create new revenue opportunities.
The complete precision benchmark survey report appears in the Fall print edition of Precision Farming Dealer.
And now from the Ag Equipment Archives…
In 1892, in a tiny village in Northeast Iowa, John Froelich invents the first successful gasoline powered engine that can be driven both backward and forward. The Froelich tractor, forerunner of the Waterloo Boy tractor, is considered by many to be the first successful gasoline tractor. Froelich’s machine fathered a long line of stationary gasoline engines and, eventually, the famous John Deere 2-cylinder tractor.
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