I have been working with used equipment for 12 years. During that time, I’ve considered many different ways to value equipment. I have looked at building calculators based on dealer price and then assumed an average sale price. I used the same method to compare dealer price to advertised retail price, cash selling price and auction value to paint a picture of machine values. The one thing I have never done is put a blanket percentage of depreciation on equipment. If you are looking for an easy button, stop. It doesn’t exist.
Like many of you, I get phone calls from lenders, insurance adjusters and appraisal personnel asking about equipment values. In those conversations, questions about the standard deprecations year-over-year on equipment always come up. My answer is the same every time: What are commodity prices going to be, what is the weather going to be like, and what are exports going to do in the coming year(s).
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To say there is a standard across the whole market is an unrealistic expectation. For this to be true, all markets would be the same and have the same issues and hurdles to overcome. On top of the overarching problems, each segment of the U.S. has a different set of problems to overcome.
For example, the trade area I work in has very few soybeans. To say the China trade issue hasn’t affected our trade area would be false, but the impact is felt less than in areas like Iowa, Illinois and Indiana were soybeans constitute a significant part of the economy. Areas that have more cattle production are likely still struggling in this economy but are again moving equipment in spite of the current economic conditions.
One of the biggest mistakes I have made as a remarketing manager was trying to develop a calculator to find equipment values. I was trying to find an easy button.
The issue wasn’t the data or the modeling. It was trying to rapidly adjust for changes in the market fast enough to stay ahead of a declining market. What I found was updating data every month wasn’t soon enough to keep ahead of the curve. That data needed to be more real time. What I found was combining past data with the most current data was the only way to make a reasonable prediction of future equipment values.
With most of the used equipment being valued well in advance of delivering the new, knowing the past can be as valuable as the present values. In my opinion, this is the best way to predict the future. Using dealer pricing removes the emotions attached to specs. What are duals worth? What's PRWD (power rear wheel drive) worth compared to 2WD? If the advertised pricing, cash selling price and auction selling price are modeled as a percentage of the original dealer selling price, you can see what the year-over-year value of specs genuinely are and what hour ranges have the most significant effect.
Unfortunately, this is a far cry from an easy button. This data has to be updated every month to make sure the outcomes are the most accurate. Auctions have to research, continually mining internet retail listing sites, and business systems have to drill down to make sure that only the actual selling price is used — no loaders, no GPS systems and no service or parts included in the selling price. Once established, you have useful data that will show trendline as they pertain to model, spec options, hour ranges and machine age.
Now that you have trendline data established, the fun begins! What does past year-over-year data show and do the years in question have the same influencers as the current year? How do you use data from a tremendous upswing in the marker going into a 180-degree downturn?
2013 was a hard lesson for me. In 2013 I had 3 years’ worth of trendline data. I had several conversations about what was coming in 2014 and beyond. All the data I had was, for the most part, worthless. I had to come up with a new system, in a new market, with entirely different buying habits. I have learned more between 2013 and today than I ever learned in the years previous.
Every piece of equipment has a different rate of depreciation based on market influencers, the health of each machine segment, as well as each commodity segment. Simply put, primary supply and demand economics. If anyone claims a blanket depreciation across all equipment segments to be equal, they are wrong. There is nothing natural about valuing equipment. Listen to the story the data is telling, and it will always work out.