Could you explain how you’re actually using this washout model to look at future industry trends? And is that helping you make a decision on that second trade or third trade, to either just move it — whether it’s auction or aggressive pricing. How does the future outlook play into your decision making with the trades?
When it comes to the future trade-ins, I’m not so much concerned about trying to find a home for the $100,000 combine. What I’m more concerned about is that first and second trade that are $350,000 or $280,000 machines. So when I look out there, I try to see how many guys might be interested in those units. Unfortunately, right now when we go to talk to somebody about a high dollar, late, low hour used model, that same person is probably someone who could buy a new one, too. So we have to be careful who we talk to. We have to get to know their business before saying, “Hey, why don’t you buy a new one?” Because there’s a likely chance they should be buying a used one.
Here’s an example of something I’ve done before. I say if we just get rid of these four or five first generation trade-in combines, we’ve pretty much solved our problem when it comes to the combine. But, our issues are going to be downstream. The misconception sometimes with stuff like this is that it’s not 15 or 20 combines that you’re looking at. It’s just five or six, maybe seven combines that you have to figure out what you’re going to do with. So, to your answer your question, I’m more concerned about that first and second generation trade-in than I am the tail end stuff.
Where are you finding the home for the equipment that’s reached that one-year level?
That is a great question. We use EDA Data a lot to track and see where we can find who’s got some level of equity built up in their machine or whatever it might be that they have. We have a great wholesale network. I have two wholesale guys who work for me and they do a great job doing that. We also have a Ukrainian on staff who sometimes sells a unit to the Ukraine. We have a lot of different tools out there that we try to use. So between wholesale and working the EDA data, that’s where we try to find that information. We might be taking a combine and swapping it around for something else that fills a hole in our inventory. For example, maybe we need an 8R or a 9R, something like that. We might find someplace where we can switch that around and bring something in that we have opportunity to sell.
How much does seasonality affect the value you put on equipment? For example, on a tillage piece, if you take it in at the end of tillage season, are you adjusting your value to cover that interest and other costs that you’re going to have?
The bad thing about this job is you put a number on something today based on the information you have today. And you have no idea what’s going to happen in the next 6-9 months or in 12 months. So I make a decision today and I don’t know if I’m right for 6 months or 9 months when that stuff comes back around. I do try to account for some sort of holding costs, that maybe we trade something in right at the tail end of the tillage sales cycle and I know I’m going to hold it for an extra two or three months longer than I would normally. And I might build in a few extra thousand dollars just for that reason.
How does your inspection of a trade factor into the valuation process?
When I worked at Prairieland, for a short period we had an inspector that worked just for the sales department. He didn’t work for the service department, had nothing to do with them. He’d go out and inspect all the combines. And we would have a very detailed inspection when it came in.
My rule of thumb when I look at combines, for example, it’s $1,000 per 100 separator hours. So if you have a 1,000 hour machine, $10,000 worth of reconditioning costs. The newer stuff’s a little more expensive to work on and I bump that up to $1,500 per 100 separator hours. That’s my general rule of thumb that I look at when they go in. If someone brings a combine in and tells me they need $5,000 worth of work on a 5 or 6-year-old combine, they better have a really good reason why they’re only going to spend $5,000 on a combine when it comes in like that.