As you can read in the “Forecast & Trends” item in this edition of E-Watch, worldwide sales of farm machinery are expected to fall by about 10% in 2015. If this is as bad as it gets, a lot of North American farm equipment dealers and manufacturers will not only be happy, but surprised. Through May, compact tractor sales are down 4.8%, utility tractors down 14.3%, row-crop tractors down 31.9% and 4WD tractors down 30.5%. And there’s no surprise when it comes to combines, where sales have been falling for 15 consecutive months.
The global forecast referenced here comes from estimates produced by VDMA, the Agricultural Machinery Assn. based in Frankfurt, Germany. I always find it interesting to read the views of those outside of our market, but who are experts on the industry.
In its analysis of the current economic environment in the U.S., VDMA says, “The party mood is most definitely over in the United States markets. This development was to be expected on account of the huge increases over the past few years. However, the current economic slump will set this year’s market back by about 3 years. The main problem is not so much the lack of purchasing power on the part of customers — although this has been significantly reduced by the weak grain and soybean prices — but the low level of investment needs.”
VDMA’s analysis is certainly on the money, but use of the phrase “party mood” is thought provoking. The more you think about it, I suppose that’s as good of a way to describe the past 7 or 8 years as any. And what do you do when the party’s over? You clean up and get back to work.
VDMA’s comments about “a kind of bubble” in reference to the influence that Section 179 and Bonus Depreciation tax allowances had on incentivizing farmers to purchase new and updated equipment also rang true.
“For many years, politicians tried to address this by creating incentives such as tax breaks on the purchase of new machinery, so farmers were able to write off the purchase value against a generous tax allowance in the first year of purchase. This measure coupled with decent incomes — firstly from arable farming and then also from milk production — has allowed sales figures of combine harvesters, tractors and other machinery to rise sharply for years and created a kind of bubble.”
For many businesses, use of the word “bubble” is scary because it conjures up thoughts of previous market disasters, such as the “housing bubble” and “high tech bubble.” The difference here is the fall off in farm machinery sales didn’t occur overnight like the others seemingly did. Agriculture has always been a cyclical business and always will be. Prudent veterans of the industry know this and most had prepared for an eventual downturn.
VDMA also addressed the issue of a large backlog of used ag equipment in which resulted from the sharp increase in new equipment sales over the last several years. The VDMA report said, “U.S. machinery dealers now have large stocks of used machinery on their hands, which have to be sold off at correspondingly low prices. This will be at the expense of the new machinery business and it is not yet clear how long it will be affected. The price difference between new and used machinery had already increased by several percentage points in 2014, so the mood among manufacturers is subdued.”
All in all, the VDMA outlook doesn’t tell us anything we didn’t already know, but it presents its view in its own words, which in itself is interesting. Despite reinforcing the less-than optimistic outlook, the German association does try to finish up on a positive note. The report on the U.S. concludes, “It’s not possible to tell at the moment if and when the trend will reverse. In general, the recession is expected to continue in 2016. However we can assume that the market is not currently suffering from any capacity or wear and tear issues and that following the boom of the last couple of years, things will settle down to a new, lower baseline over the medium term.”