It’s just about a wrap on the second decade of the 2000s and from my perspective things are looking a “little” better than they have in a while in some respects, but not so much in others. For the most part, the first half of the last decade is very different from the second half. But it’s simply a matter of ag cycles and plateaus, according to some.
For instance, take North American large ag equipment sales. The average annual sales of high horsepower and 4WD tractors and combines was significantly stronger in the first half of the past 10 years (where we had full year sales numbers) compared to the second half of the decade.
North American Tractor & Combine Sales — 2009-18
|Equipment||10 Year Avg. 2009-18||5 Year Avg. 2009-13||5 Year Avg. 2014-18||5 Year Change|
|100 HP+ Tractors||24,941||27,305||22,577||-17%|
It should come as no surprise that the same pattern can be observed when it comes to corn and soybean prices. Large ag sales have historically followed commodity prices. As shown in the table below, the first half of the 10 year period was significantly stronger than the last 5 years.
Iowa Cash Corn & Soybean Avg. Prices
(calendar year, per bushel)
|Avg. Corn Price Received||5 Year Change||Avg. Soybean Price Received||5 Year Change|
|*includes only 10 months of 2019|
Source: Iowa State University
One economist says it's all a matter of historic ag cycles.
According to a DTN report that was re-published by AgriMarketing Jason Henderson, director of Purdue University Extension and former Federal Reserve economist, ag is another cycle characterized by plateaus. The industry booms and fades and then there’s a plateau.
“We’re in the process of re-entering that plateau stage. It's going to last — if history repeats itself — about a decade,” he said. It will depend on agricultural trade and the next demand boom, Henderson adds. “Farmers are going to look to consolidate. Farmers are going to look to diversify. And they are going to look to the government to help them out.”
He says the two preceding plateaus in ag took place between 1955-72 and then 1989-2003. During these “plateaus” crop prices tend to hover in a narrow range near the cost of production. What this means is flat prices and flat incomes.
After adjusting for inflation, farm incomes during the past plateaus averaged about $80 billion. USDA is projecting about $92 billion for 2019 — with 20% or more coming from federal support.
During these plateaus, thin profit margins will result in further consolidation with some producers exiting the business, while others search for additional income. (Can you spell h-e-m-p?) But traditionally, the way to profitability is increased productivity, says Henderson. Typically, producers’ first move is to reduce capital expenditures. (Sound familiar?) Then they try to figure out ways to reduce input costs but not give up crop yields.
At the same time, producers will invest in things like technology and land improvements. “They will make investments if it produces more yield ... because ultimately that's what improves their bottom line,” says Henderson.
This along with recent progress in the U.S.-China trade dispute that had a particularly negative impact on agriculture and the House passage of the USMCA deal with Mexico and Canada, I think will add some positive momentum to the start of the next decade.
Add in some other positive signals that could boost ag equipment sales in the next year or so, like an aging farm equipment fleet that will need to be replaced. Also, the recent Purdue Ag Economy Barometer survey results seems to indicate that farmers are at least a bit more optimistic going into 2020. And, maybe the best sign of all comes in the results of Ag Equipment Intelligence’s most recent Dealer Sentiments & Business Conditions Update survey. A net 19% of dealers say they’re more optimistic than they were in the previous month. This is the first positive reading we’ve had in over a year and a half.
Looks like we just might get the next decade started off on the right foot.
All of us at Farm Equipment and Ag Equipment Intelligence wish you a Blessed Christmas and a Happy & Prosperous New Year!