In 2013, the signs of a looming collapse were becoming clear. In Farm Equipment, Dr. Jim Weber had been writing a series titled “The Business of Selling.” An article from the series “Gathering Storm Clouds” was posted in July 2013. I am paraphrasing but, in the article, Dr. Weber talks about low return on sales, dealerships dependence on volume and market share payments. Because of the low returns, dealerships should have been failing in droves. But because of record high commodity prices, record low interest rates and record on-farm income, dealerships were able to spike margins with new and used wholegoods.
Leading up to the article, conversations had been taking place about how to handle one year rolls and what to do with used equipment piling up on lots. By this time combine rolls had become an issue. Dealerships were starting to see carryover from bigger multi-unit customers.
For example, if the customer buys 6 new machines and trades in 6 machines, when the next round of trade-ins where coming there might be 1-2 units still on the lot. This kept happening for the next 2-3 years. This was the start of stagnant, slow moving inventories across North America. Dealerships were forced to increase trade differences to bring equipment back in line with market demand. Thus, started the decline in large and small ag wholegood sales.
This created a backlash in the retail market. Retail average advertised pricing compared to average auction value started to widen. Overnight trade differences doubled and in some cases tripled. 2014 was first year I noticed a considerable spike in auction activity, even more so at the end of the year. The period of October 2014 until December 2016 marked the free fall of used equipment values.
“Equipment demand is shaping the market not equipment supply…”
To me, the SEMA Equipment Auction held Nov. 29, 2016 was the turning point when the market began stabilizing. From the SEMA Equipment sale through the end of 2017 auction values started to form a soft bottom. Throughout 2017, the auction market no longer had the wide swings from sale-to-sale. The values became more consistent and predictable. The average retail advertised pricing compared to average auction results narrowed.
At retirement sales and some dealer consignment auctions, reported values were mirroring dealership retail selling prices. The retail market also showed signs of life. More dealers reported higher sales of new equipment then in past years and late model low hour used equipment was in higher demand.
Because of higher trade differences, producers are running their equipment longer than in the past. The used equipment market is lined with 2012-14 model year machines with more average hours of use per year then I have seen in my career.
As the older generation retires, operations fail and more farm ground changed hands, the same equipment has been run across more acres. Which, in my opinion, is causing a spike in new and used equipment sales.The lack of late model and low hour equipment coupled with high reconditioning costs have the market moving toward a more stable condition.
With more and more producers looking for ways to protect cashflow, to find better ways to manage risk, and increase efficiencies, leasing and extend warranties have become a bigger part of the sales conversations. Lease return equipment has also filled some of the void for late model, low hour equipment demand in the market.
This year will mark the 5th year of the current downturn. The positive side is it feels like a soft bottom has formed. Auction prices are stronger and more consistent. Equipment demand is shaping the market not equipment supply. The gap between advertised retail prices and auction values have tightened to a very manageable point. Model year 2012-14 machines have stabilized and are no longer creating wide rifts in auction value. These machines are now showing consistent auction values and have predictable
Of course, like anything, there are exceptions. I can give examples of shock and awe on both sides of the spectrum. Model year 2012-14 have also become a commodity because the overwhelming supply in the market. This should be no surprise since this was the height of the ag economy super cycle. So, for these units to be stable or to show signs of stronger stability is a very encouraging indicator.