Just when we were starting to feel a little bit better about life in the farm equipment business,* we’re starting to hear more news about increasing raw material costs that will be showing up in higher prices for ag machinery.
For the past few months, dealers responding to the Ag Equipment Intelligence monthly Dealer Sentiments & Business Conditions Update survey have commented on price hikes coming from their manufacturers. Here’s a sampling: “Our manufacturer announced new price increases and significantly pulled back on incentive programs”… “Our manufacturer raised new equipment pricing by ~5% and reduced cash back incentives in January”… “We expect more rebuilds than equipment purchases in 2017, as equipment remains too expensive relative to farmers’ income”… “We are being forced to discount to absorb part of the price increases we are getting from manufacturers.”
If you read Mike Lessiter’s blog from last week’s E-Watch, Ann Duignan, analyst with JP Morgan, warned dealers during the annual meeting of the United Equipment Dealers Assn. to expect higher prices as raw materials come under pressure. Countries like China are buying steel, aluminum and copper because they’re afraid their currency is going to devalue, she says. Plus there’s the acceleration of economic activity.
“The problem for you guys, as dealers, is that the steeper these commodities rise, the more likely that your OEMs will raise equipment prices,” Duignan says.
Along with metals, the price of rubber for tires is already seeing hefty price increases.
Last week Trelleborg, a manufacturer of tires for agriculture, forestry and light agricultural applications, announced an 8% price increase on its tires in North America, effective April 1, 2017. According to the tire maker, the price increase is driven by recent increases in raw material prices.
On March 3, the U.K. newsletter Agrimoney.com reported that the price of rubber is on an upswing — potentially doubling — due to heavy rains in Thailand, which is the top producer and exporter of rubber.
Again, China is a major player in the rubber market and is impacting pricing. As its automotive production topped 3 million vehicles for the first time last year, they are forecasting a 5% increase this year.
“The better the economy goes, watch out,” said Duignan, “it’s going to drive these commodities up further and squeeze your profits.”
I think what many dealers are saying right about now is, “What profits?”
*A net 11% of dealers reported they were more optimistic in the February Dealer Sentiments & Business Conditions survey (31% “more” optimistic; 20% “less” optimistic). This is the first positive reading for dealer optimism since March 2014.