The ag economy is fragile at best! Interest is creeping up, commodities prices are soft, and the ability to make profit is a struggle day-in-day-out. This is not something new. Producers across North America have faced a declining economy since 2013. Each has been harder than the year before. Now it is spring of 2018 and there is no relief in sight. Farm income is predicted to be 7% less than last year and most weather models predict drought for most of farm country. 2018 will truly be a test for farmers and ranchers across all of North America. The threat of U.S. ag tariffs will not help anything.
On my podcast, Moving Iron Podcast, I have talked about how the used equipment marketplace is stabilizing and is forming a soft bottom. Auction values are growing stronger and are some of the strongest I have seen in a long time. The low hour, good condition stuff has been selling and is in high demand. I have said on my podcast, the surge of used equipment buying, in my opinion, is because producers are buying more because they have to; not because they want to. In most cases, equipment has more hours than producers feel comfortable with or the machine has high recondition costs to be field ready for the 2018 planting or harvest season. Effects on cashflow dictate these buying decisions. If the move increases cashflow, limits risks and increases efficiencies, then there is not much to think about. On the flip side, good luck!
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The reason there is not a hard bottom is because the current state of the ag economy. One slip could send the market into a spiral similar to 2014. The used equipment marketplace has been cut to the bone. Anything more would be the severing of limbs. If the current agricultural product tariffs are implemented, I see three outcomes.
- Already strapped producers will fail. I have ready estimates of an additional 10% increase in farm failures for 2018 and 10% more in 2019. If 20% of the equipment buying population is removed the effect on the used equipment market could take a decade to recover from.
- Like 2014-15, buyers will be buying at auction driving retail values downs and repricing the market. Dealers will be forced to make balance sheet decisions with the new and used equipment on hand. This will increase the ramp up of dealership consolidation and will coincide with farm consolidation. This will put more equipment on the open market and with an already low supply of low hour, good condition equipment the market reaction will be all time lows for used equipment. I think this could result in a 15%-20% slide in used equipment values in the first 18 months of the tariffs being implemented.
- Dealership failures will be certain. Like in point 2, this will fuel dealership consolidation. Not all dealers will be on the sunny side of M&A activity. Some large dealer groups will fail! Cash will be king and dealers who have their proverbial house in order will have opportunities to grow. This shake up in the market will send more used equipment to the open market destabilizing equipment values further.
Right now, the market is showing some strong signs of rebound. Each day values get a bit stronger and customers are buying equipment. If the market is left to deal with less on farm income and raising interest rates, the market is proving it can deal with these negatives. If even lower on farm income, greater market uncertainty, and rising interest rates are in store, the market will not be able to handle these extreme negatives.
If you would like to continue this conversation comment below or hit me up on Facebook, Twitter or Instagram @MovingIronLLC ,send me an email at MovingIronPodcast@MovingIronPodcast.com or visit www.MovingIronLLC.com. You can Also listen to MovingIron Podcast on iTunes, Google Play, Stitcher Radio, Tune In Radio, and Sound Cloud. So until Next time, Let’s Go Move Some Iron!