Dealers can’t plan their way around ag’s ups & downs, but they can prepare for the best & worst by watching the big trends & paying attention to the little details.
With the exception of 2009 — a year that, in retrospect, wasn’t all that bad for sales of farm machinery — dealers have experienced 5 remarkable years of consistently strong unit sales. This has surprised many dealers, even the most optimistic ones. A Colorado dealer told Farm Equipment recently, “I’ve lived through two bad cycles (in the 1980s and ‘90s) so I’m really enjoying this one.”
The reason he appreciates it so much is because he, like many dealers, hadn’t seen such a strong run of machinery sales over such an extended period of time for maybe a decade or two. And, of course, he understands it won’t last forever. That’s a given in this cyclical business.
While sales of new wholegoods has received most of the attention, for the most part, the past 5 years has been healthy for each of the major segments of dealer operations. Graham Drake, president and CEO of Cervus Equipment Corp., based in Calgary, Alberta, says the steady revenue mix during this period also demonstrates what a balanced trend it’s been.
Cervus is one of the few publicly held equipment dealer groups in North America, and as such, every aspect of its operations is scrutinized in great detail. He says he was recently questioned about revenue mix of parts and service vs. wholegoods. “So I went back 5 years. I found that while we’d seen significant sales growth overall, we maintained the same split of parts and service to total sales during this period. Actually, we’ve been within 1% of the total going back 5 years.”
Despite these ongoing good times, most veterans of the farm equipment wars have long memories that have engrained in their DNA a healthy does of skepticism.
“We’ve been on a great run, but in the ‘70s we had 7 or 8 great years before the bottom fell out...”
— Don Athen,
A&M Green Power
In the back of their minds, they’re waiting for the other shoe to drop. Based on history, they’re correct in doing so; agriculture’s boom-bust cycles are well documented. Even with their wealth of experience to fall back on, can a dealer really plan for either a boom or a bust?
One might count Don Athen of Iowa’s A&M Green Power Group, among the skeptics, but having been in the farm machinery business since 1972, he still has vivid memories of how cyclical his business can be.
“We’ve been on a great run, but in the ‘70s we had 7 or 8 great years before the bottom fell out in the early ‘80s. I may be overly cautious, but I’m predicting a downturn in the near future. I don’t believe it will be like the one in the ‘80s, though.”
On the other hand, Athen says many of the dealers who survived ag’s bust in the 1980s didn’t fare too badly because they were prepared and were able to take advantage of aftermarket opportunities. “You should always prepare for the worst and hope for the best,” he says. “A downturn now could actually benefit dealers who are prepared for it.”
He still remembers learning the hard way when, during the 1980s farm crisis, he was forced to rent used combines. He then opened a salvage yard and sold used parts from the combines to farmers who didn’t want to or couldn’t afford to buy new parts. “I learned from experience that no cycle lasts forever.” He hopes the younger dealers who have known little else but prosperity won’t have to figure it out the way he did.
Assessing Market Signals
For all their experience with ag’s ups and downs, few farm equipment dealers will tell you they have a pat formula for determining when equipment sales are going to ramp up or fall off. But most have signals — external and internal — they recognize as indicators that business levels are changing — one way or another — and to spot significant trends. Even at that, few dealers have a formalized plan to address shifts in business conditions. But based on their experience, most have some idea what they can do to minimize the impact on their businesses should the current boom cycle reverse itself.
“With good asset management, knowing your customers and good cash management, you’ll never go wrong...”
— Graham Drake,
Cervus Equipment Corp.
When it comes to forecasting sales trends, at a minimum, farm equipment dealers need to know at least as much as their customers know. And what farmers know for sure are the costs of the their inputs use and pricing of the commodities they produce. Together, these two factors determine their level of confidence, and confidence is what drives ag equipment sales.
But as risky as farming can be for producers, at least they have a government safety net to fall back on via the Farm Bill. Dealers don’t. As a result, it’s imperative that equipment sellers are more adept at interpreting market patterns and planning accordingly.
In addition to paying attention to macro-trends that steer the industry in one direction or another; dealers must scrutinize the details of their everyday operations. Through experience, dealers know which metrics are reliable indicators when changes that have the potential for impacting equipment sales are in the offing.
Commodity Pricing. Asked what market signals are the best indicators of impending changes in the direction of farm equipment sales, every dealer who responded to Farm Equipment’s survey, as well as those who were personally interviewed for this report, say “commodity prices.” But most also added a qualifier, which would imply that commodity pricing in and of itself doesn’t stand alone as a key indicator.
David Ross, Advantage Farm Equipment, Wyoming, Ontario, says, “Grain and livestock prices are obvious indicators, but I also watch bids and asking prices on land.”
"In a downturn, the first areas I expect to hear from are parts and service, especially the service department..."
— Brian Carpenter,
Champlain Valley Equipment
“In the short term, it’s commodity prices,” says Leo Johnson of Johnson Tractor, Janesville, Wis. “As they drop, there is an almost immediate push back on pricing of new equipment. If this market deteriorates further, we will see the beginning — if we haven’t already — of a down cycle.”
For Kansas dealer Greg Simpson of Simpson Farm Enterprises, it’s grain prices, interest rates and possible changes in Section 179 depreciation rules.
Lance Carlson of Quincy Tractor, Quincy, Ill., adds his strongest indicators are “the grain market and knowing what my customer base doesn’t need but is buying for tax purposes.”
While Kent Senf of C&B Operations, based in South Dakota, pays attention to commodity prices, he says that he also factors in crop inventories, ethanol demand and other components that drive crop and livestock pricing to gain a deeper understanding of the market conditions. “We look at things like corn ending stocks and what’s happening from a global perspective, like crop yields in South America and what China is buying and selling. Generally, what’s going out and what’s coming in.”
Also, because many of C&B’s 24 store locations are in heavy hay growing areas, Senf keeps a trained eye on its prospects because the availability of hay will ultimately impact the price of corn and other feed grains.
“There’s not a lot of hay out there for cattle feed right now, so a lot of our customers have to search out alternatives and that’s going to probably take up more of the corn production than it has in the prior years.”
Ethanol production is another leading indicator for corn pricing, says Senf. “It was down considerably last year when the price of fuel dropped, which impacted the price and ending inventory of corn. But from everything I’ve seen and read so far, it looks like ethanol production will at least reach 2012 levels this year.”
Higher Inputs. As farm equipment dealerships expand in size and scope, planning for market shifts has taken on a whole new dimension and depth of industry knowledge. Simply keeping tabs on the commodity markets no longer counts as strategic planning.
From the producer’s point of view, rising input costs can play as big of a role in buying decisions as commodity prices. Randy Amosson, general manager of Precision Equipment’s 8-location dealer group in Iowa, noted recently that “Input costs have caught up with revenues” and when this happens, growers pause before making big equipment purchases.
According to Drake, dealers fully experienced the impact of rising farm inputs in 2008. “Commodity prices hit a real high, but so did fertilizer and fuel costs. This really strained farmers’ margins, profitability and cash flow. Did it affect equipment purchases? It’s difficult to say in isolation because so many other things hit about the same time. But at that point, farmers hadn’t had a couple of good years to strengthen their balance sheet, so they felt significant pressure on their cash flow because of input costs.”
Intangible Factors. Besides the factors that can be assigned hard numbers, Athen of A&M Green Power, says dealers need to examine the subtle impacts of things like government policy, tax and depreciation rules, global competition, crop insurance and the politics of the renewable fuels standards. These all factor into farmers’ buying decisions, he says. “We need to watch all of these things” to be prepared for the market shifts that lead to boom-bust cycles.
Trends — Not Fluctuations
The savviest dealers know it’s essential to differentiate singular or short-term movements from developing trends. Market fluctuations take place daily and can be significant, but it takes time for trends to develop and that’s what dealers need to keep in perspective.
California dealer Al Parolini of Coastal Tractor, has found the movement of commodity prices over an extended period of time and a build-up in the dealerships’ receivables are good indicators that something is probably afoot. “Within our regional fresh vegetable industry, when market pricing remains below breakeven for an extended period, usually 18-24 months, and we see our receivables remain open for longer than normal periods, we begin watching things very closely.”
Clint Schnoor, COO of Idaho-based Agri-Service, watches for price movements over a 9-month period to determine if and when a business cycle is apt to change.
“If you’re paying attention to what wheat, soybeans and corn are doing as a whole, you can get a good sense of when the ag industry is about ready to hit a downward cycle,” he says.
“Obviously, prices go up and down every single day. But when you see a high peak or an aggressive climb in commodity prices followed by a steep trough, it’s a pretty good indication that we’re looking for a downturn in the market as a whole,” says Schnoor.
Drake says Cervus Equipment closely watches its sales on a rolling 12 month basis as a leading indicator, particularly because seasonality is so prevalent in agriculture. “We pay close attention to this because you might have one month that’s down and then it picks back up, so you really can’t look month-to-month and compare it to last year. But on a 12-month basis, if you have 2 or 3 months where that rolling 12 month average starts to dip, that could be an early indicator of a change.”
He points out that this was particularly evident in 2009 as the global financial crisis shifted into high gear. “While our ag business remained strong for the entire period, in the construction and industrial equipment side of our business, our sales were strong for several months after the September and October period when other markets headed down. But that was because we were still processing sales that were made earlier. Then in January and February we started to see things dip dramatically. By watching the trailing 12 month sales, we were able to recognize this,” says Drake.
Monitor Operational Metrics
While keeping a keen eye on the macro-trends that are shaping ag’s big picture, it’s as imperative, or even more so, that dealers monitor basic operational and financial benchmarks to spot emerging trends at the store level. Even small changes in farmers’ buying habits can signal something bigger is in the offing. Dealers overwhelmingly identify used equipment values and turns as critical metrics that must be scrutinized on a regular basis.
Much like Drake, Mike Hedge of Birkey’s Farm Stores also relies on a rolling 12 month income statement to spot trends. With all of its 12 ag equipment locations located in Illinois and Indiana, Hedge says, “We’re in a big grain area and sell a lot of large combines and tractors. We’re highly dependent upon wholegood sales where big swings can happen very quickly and result in big problems.”
He says he’s found the most effective way of getting an accurate picture is through a rolling 12 month income statement. It not only helps to spot trends because it takes much of the monthly volatility and seasonality out of that information, “It also helps us identify actual trending that’s going on in our sales activity.”
“It’s very easy in this economy to ignore used inventory turnover and management of the balance sheet because we haven’t had to...”
— Mike Hedge,
Birkey’s Farm Stores
Hedge says from that information, the dealership calculates a number of ratios looking for return on assets and return on equity to evaluate overall performance. “While they’re good barometers, we find that we need to drive some of this performance data to a lower level, and for us it’s managing used inventory turnover and financial leverage.”
He says as an organization, they’re always looking for 4 times inventory turns on used equipment. “If turns move from 4 down to 3.5 or 3.25, we start getting very concerned. It doesn’t take a huge move, but if it trends in a negative direction for 3, 4 or 5 months, then we take action to address it.”
The emphasis on used equipment inventory is part of Birkey’s “company DNA,” says Hedge. “It’s a part of every Monday morning sales meeting and every program that we have internally.”
Little Things Add Up
As Hedge has discovered in his 20 years with the dealership, losing focus on the little things usually leads to big problems when the marketplace changes course. Planning for sudden shifts in the business climate is a matter of managing the dealer group’s balance sheet.
During prosperous times like what the industry is going through now is when dealers can’t afford to become complacent, he says.
“It’s very easy in this economy to focus 100% of your attention on new sales and market share,” says Hedge. “It’s easy to ignore used inventory turnover and management of the balance sheet because we haven’t had to. Used inventory has sold and the cost of borrowing and credit has been very cheap. As equipment dealers, we haven’t been forced to be diligent with the management of business details and it’s very easy for that to get out of whack.”
From experience, he says, what happens when the sales cycle slows and there’s long lead times on new inventory is that it takes a significant amount of time to work through the new equipment and to get the used turnover back under control.
“We’ve seen the industry cycle down significantly 2-3 times while I’ve been here. Anyone who has been through it knows it takes time to get inventory turns back to where they need to be. You’re certainly in a better position if in the good times you push hard to turn inventory quickly. If you find yourself in a position of poor used inventory turns and the market goes south, you’re in for a learning experience,” Hedge says.
As his title would imply, used equipment is the major focus for Casey Seymour, remarketing manager for Prairieland Partners. He’s been closely observing used sales and pricing trends that tell him that a slowdown may be underway. Prairieland is a 9 store dealer group based in Hutchison, Kan.
For the past 3 years, Seymour has seen the values of used combines continue to deteriorate. Using the auction market for reference, he says that with each consignment sale in recent months used combine values have dropped. “It’s been very nominal, but values have been consistently lower than the previous auction.”
He’s not only observing price drops for older (2009) combines, but even newer (1-year old) units, which he notes are averaging 80-85% of the original dealer price. “I also looked at some 2009 machines recently and found they were about 45-55% of the original dealer price. Considering the price increases of new machines in recent years, it’s obvious the combine auction market is not responding like other segments of the market.”
“When you see an aggressive climb in commodity prices followed by a steep trough, it’s a good indication we’re looking at a downturn…”
— Clint Schnoor,
He has also observed some more recent softening in the used tractor market. “The results have not been huge, but it appears the drought in the Corn Belt has brought more one-year old tractors to market and the retail demand seems to be slowing. The pricing is still strong, but they are not selling as fast as they have in past spring selling cycles. We’re not getting the overwhelming demand we’ve seen in the recent past. I contribute this to the drought and uncertainty about this year’s crop,” says Seymour. While the movements may seem minimal, they’ve been consistent and bear watching, he says.
Schnoor of Agri-Service says used equipment inventories typically will build up over an 18-24 month timeframe. “When you see that increase without a lot of movement — and that’s one thing that most dealerships must look at internally — you need to recognize that we’re going into a slower cycle,” he says.
Declining Aftermarket Sales
Chris Carnevale, general manager of McFarlane’s, a Wisconsin dealership, agrees that falling used equipment values and sluggish sales are good forward indicators of where the ag machinery market is heading. But he says there are other subtle signs that will provide a dealer with clues about the state of his customer base. For one, he explains, “When farmers start repairing older equipment that should not be repaired” it’s usually a signal that there’s some financial issues he’s dealing with.
Parolini of Coastal Tractor echoed Carnavale’s sentiments when it comes to parts sales. “When we witness a reduction in the normal parts purchases, we recognize that it may be more serious than a short-term turndown.”
But this, again, is often a matter of drilling down beneath the numbers, according to Amosson of Precision Equipment. He points out that the high volume of new machine sales in recent years, particularly by customers who have traditionally purchased used equipment, has weakened parts and service sales. And between farmers turning over their equipment more often than normal and the reliability of the new products, overall aftermarket sales have suffered.
Brian Carpenter, owner and general manager of Champlain Valley Equipment, a 4 store dealership in Vermont, has found aftermarket sales patterns to be a reliable indicator of shifting buying trends.
“The first areas I expect to hear from are parts and service, especially the service department. That’s where the conversations take place. If they’re doing it themselves you may not hear it from the parts guys because they may just come in and get the parts they need,” says Carpenter.
But if farmers and other customers are starting to get cash poor, they often try to get by without having major service done. “When they start telling the service department to only fix certain things when they call in and they’re really skimping on a repair, that’s an indication that things are tightening up.”
Carpenter says he finds customers will deal with an oil leak and continue to add oil vs. splitting the engine and repairing the seals. “Or if a repair involves comfort or convenience costing several hundred or a thousand dollars, they’ll pass on those repairs and only do mandatory repairs to make the equipment functional.”
Drake of Cervus concurs that declining parts and service sales will often be the first sign that financial stress is setting in with farmers. Equipment purchases, he says, are usually financed over time, but sales of parts and service are generally cash transactions that require payment within 90 days.
“It’s all about cash flow,” says Drake. “A couple of years ago, we picked up on a trend in which parts and service sales were up significantly in one of our regions compared to the other. We’re not talking anything dramatic, it was only about a 10% spread.”
What they found was the farmers in the region where grain was more prevalent had a good crop and revenues were up, that’s where parts sales were up. But the other region that was more heavily invested in cattle didn’t have a good year. Drake said it showed that parts and service sales are generated by cash flow and optimism more so than equipment, which tends to be more sensitive to longer term variables.
The recent softness in commodity prices is causing dealers to take a harder look at where they are most vulnerable. If a downturn in ag equipment sales should occur, the dealers Farm Equipment spoke with listed new and used equipment inventory, receivables and expense control as areas where dealers are most susceptible. The most common areas being scrutinized are equipment inventories, particularly used machinery, and receivables.
According to Carpenter, in the Northeast U.S., the markets for farm machinery are highly diversified, but the dairy segment is the most prominent. He says, “Our guys are paid twice a month and for a lot of them payments for equipment will come out of one milk check. So we don’t panic after 30 days, but if they get behind and don’t pay us within 60-90 days, that throws up a big red flag.”
Senf of C&B Operations sees used inventory as any dealership’s biggest risk, which, he says, “From and economic standpoint is no different than it was 10 years ago. Dealers who are maintaining used inventory at a level that can be turned quickly and those being able to sustain some loss on it if necessary should be OK. Otherwise, it could become extremely difficult.”
“Certainly the number one vulnerability for an equipment dealership is new and used inventory,” says Drake. “In our case, John Deere manages the new equipment inventory quite well and has for decades. But new inventory for other product lines is another matter. Asset management is probably the one area that dealers are very vulnerable during a downturn.”
The expense side of the ledger also deserves scrutiny, according to Drake. “Expense to sales has grown almost as quickly as overall sales,” he says.
“The best possible place I can get information is from our customers...”
— Kent Senf,
Johnson believes if equipment sales begin trending downward, dealers are most exposed to fixed overhead costs and used equipment, especially planters and combines. “The value of combines, planters and tillage tools will be the first to take a hit,” he says. “A couple per location is not a big deal, but if there are dozens sitting there, watch out.”
On fixed costs, Johnson says, “Many dealers have added locations, built new buildings and upgraded service facilities with borrowed money. Payments for many of these investments will go on for years and hopefully won’t put too much of a crimp in cash flow in a downturn.”
Gauge the Mood on the Farm
Most dealers agree that the true pulse of the industry comes directly from the farm customer. If anyone can offer equipment retailers a true picture of what to expect and what’s happening, it’s going to come from equipment buyers. “In my mind, the best possible place I can get information is from our customers,” says Senf.
With continuous customer contact, you don’t need to be a mega-dealer to conduct some straight-forward, boots on the ground market research.
Drake says Cervus has continued to increase its focus on customer relationships. “And I don’t mean we’re using a new software package,” he says. He’s talking about face-to-face account management.
“We’re intentionally building personal relations with customers which means really understanding their business. So, to me, the main driver for every dealer is knowing your customers, whether you’re operating 2 stores, 5 stores, 10 stores, 20 stores or 105 stores. To understand what your customers feel and how confident they are in the economy and the market is to hear what they have to say.”
While Drake oversees a 35-location dealer network today, early in his career he was a single-store operator, and he says he can relate to what smaller dealers are going through to stay on top of their businesses.
“When I had my one store, customers were my main source of information, and they were a pretty good source. Now balance that with understanding the bigger market and making sure you’re staying aware of what’s going on and what the trends are. That was my problem because in a single store I had my head down and I was busy working. I would finally look up and find I had a used equipment problem. That’s not a global issue where you can’t do much about it. It’s a local dealer issue that you need to deal with. So is knowing your customers,” says Drake.
Understanding how your customers feel, their pressure points and where they think they’re going to be in 3-5 years are key to understanding their needs. “Dealers should be asking the same questions you’re asking us for your article,” says Drake.
Agriculture is a cyclical business. It always has been and that’s not going to change, he adds. “But lots of people have managed very well through all of those downturns.”
Drake says, it requires a longer view and attention to details, something beyond what this spring or the next year is going to look like. “But with good asset management, knowing your customers and good cash management, you’ll never go wrong.”