If you have listened to my podcast, you would have heard me talk about the canary in the coal mine. The canary I am talking about is auction values and how they correlate to retail values. Auctions values are sometimes looked at as a last resort or a dumping ground, but I think auctions will have a more significant future role.
Auction values have been high throughout 2021, and for a good reason — the lack of new equipment coming out of factories increased the potential for on-farm income and the complete lack of late model and low hour equipment. What is known is in very short supply, and if you are lucky enough to have it, it is time to take advantage of the market. Unfortunately, along with solid upside potential, the market will eventually have a sharper downside.
Auctions have a direct and very distinct relationship with the retail market. Both of these markets differ from each other but are tied so closely that one can't exist without the other. At this current point in time, the used equipment auction prices are at retail value or very close. Producers are looking to upgrade their equipment and are willing to pay for it. If you are buying equipment, you are buying at the top of the market. Because everyone is buying at the top of the market, everyone needs to pay close attention to the tea leaves auction values are presenting.
Right now, there aren't any signs that show used equipment values moving in any direction but up. Even used combine values are strengthening, as I talked about in my last article. I think combines will have a strong push through the end of the year. And yes, I believe we will have a shortage of used combines by the first of 2022. Right now, is the best time to upgrade combines if upgrading is part of the 2021-22 business plan.
History is something I have always found fascinating. The lessons learned from the mistakes of the past are priceless. The ramp-up seen right now is like nothing we have seen before. I’ve talked with people who have been in this business a long time and have said they don’t remember when new equipment was unavailable and there wasn't used equipment on the lot to sell. “If you don't have one, you have the other,” one salesman said to me. The part of history I want to refer back to is 2014.
2014 was a very bloody year, to put it mildly. The price of used equipment was in a hyper deflationary mode, and each day was worse than the day before. Auction values were in free fall, and each sale was worse than the sale previous. The canary in the coal was dead and turning to powder. However, dealers were holding on to the fact that inventory values were still high, and they could still “retail or rent their way out of it.”
Data tells me that when retail advertised price exceeds 20% of the auction value, the end user buyer will buy from the auction first, in most cases. It doesn't matter what incentives the dealer has to offer; auctions will be the winner. In 2014, combine auction values where $80,000 - $120,000 lower than retail advertised pricing. No amount of 0% interest or extended warranties are going to change the mind of the end-user. Dealers didn't react fast enough to the signs presented in 2012.
2012 was a great year to be in the equipment business! New equipment was selling like hotcakes. Order boards were full, and so were dealer lots. Notice I didn't say anything about used equipment? Don't get me wrong, used equipment was selling, just not at the same pace as new equipment. Instead, recent equipment sales dramatically outpaced the sale of used equipment. At the time, new equipment made more sense for two reasons. One, on-farm income was at all-time historical highs, and two, Section 179. Both of these circumstances contributed to the collapses of used equipment values as commodity prices weakened.
In 2012, combines started to show up at auction, 4WD started to show up at auctions, and even row-crop tractors started showing up at auction. It wasn't long before sprayers and planters joined in the fun. All of the machines were selling well below current value and were getting cheaper by the day. Two years before 2014, all of the signs were coming into focus, and in most cases, nothing changed. The conversations were starting to circle around to “What are we going to do with all of this used equipment?” or “When do you think it will pick back up and used equipment will start moving.”
Just because values are good right now and auction values are high, auctions still need to be tracked and understood. If auctions values aren't tracked, 2012 -2016 will happen all over again, and this time it will be worse. Customers need to be educated about what is going on and why it is time to buy or set back and see what happens. Dealers need to have personnel dedicated to understanding what is happening and briefing dealership staff weekly about the “State of Market.” With the amount of data available, there is no reason to be caught flat-footed this time. Listen for the canary, and if it's not tweeting, find out why.