It was 5 years ago when I visited with Mike Boehlje, the distinguished professor in the Dept. of Agricultural Economics at Purdue University. At that time, signs were appearing that indicated the industry was in for a slowdown following 4-5 really great years of equipment sales. The special report that ensued was called “Dealing with Ag’s Boom–Bust Cycles.” Boehlje discussed a couple factors that directly impacted equipment dealers.
Some of the things I’ve been hearing, as well as preparing the article “Ag Credit Conditions Remain Stable … For Now,” caused me to review Boehlje’s comments from 2013. Two of the issues that he discussed really stood out as they relate to dealers today.
First, he said dealers must avoid the mistake made during the farm crisis days of the 1980s. Boehlje said, “Dealers must be careful about extending a lot of credit to farmers buying machinery. They don’t want to become the farmer’s banker.”
Word has it that this is happening with some seed and fertilizer companies and their dealers. According to the July 18, 2017 issue of the Wall Street Journal, Deere & Co. was providing short term credit for crop supplies such as seeds, chemicals and fertilizer (“America’s Farmers Turn to the Bank of John Deere”). That’s fine, Deere is in the lending and finance business, farm equipment dealers shouldn’t be.
What is more evident is the specter of rising interest rates. In that 2013 report, Boehlje warned that higher rates were inevitable and the era of cheap money would necessarily come to an end. He said, eventually interest rates would rise. “We don’t know when, we don’t know how much, but we’ve been in a consistently declining interest rate environment for the last 20 years, which has made it favorable for farmers to make capital expenditures.”
The Fed started slowly raising rates last year and based on recent announcements, we can expect at least 3 more this year that will amount to about 0.75% increase.
Most dealers are aware that rates are rising this year, which could impact farmers’ purchase decisions. As shown in the credit conditions report in this issue, nearly 80% of dealers surveyed by Farm Equipment during the first week of February say they expect interest rates to increase for retail financing and 63% believe their interest rates will rise for floorplan financing.
The bigger question is do dealers believe the higher interest rates will affect their customers’ purchasing decisions. Nearly two-thirds of the dealers responding to the survey expect that even a “modest” rate hike will cause farmers’ to think twice before purchasing new equipment in 2018.
Not only do rising rates impact customers, but dealers will also feel bite on their bottom lines. According to the 2017 Cost of Doing Business study, on average North American farm equipment dealers’ interest expense was 0.76% of sales, or about $100,000. This is up from $64,500, or 0.44% in the 2014 study. For those dealers with more than $75 million in annual sales, they paid nearly $1 million, or 0.71%, in interest expense in the 2017 study vs. $482,000, or 0.36% of sales in 2014.
Like many external factors, there’s not a lot dealers can do about rising interest rates, but they can work to control inventories, increase turns and minimize interest expense. As one former dealer told me recently, “Don’t give into pressure from your manufacturer to take on more inventory than you need.”