Making Precision Profitable
In today's newscast we look at some good news surrounding crop prices, Canadian dealers' outlook for the planting and harvesting seasons, meeting precision margins and Art's Way's second quarter financial results.
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I'm managing editor Kim Schmidt, welcome to On the Record. Here’s a look at what’s currently impacting the ag equipment industry.
AFN: $45.75 -2.68
Farmers and equipment dealers alike got a bit of good news this week. September futures for corn saw an 8.7% increase, closing out last week at $4.26 per bushel.
Corn and soybean futures saw their strongest sessions in 5 years according to USDA’s June 30 Planted Acreage and Grain Stocks reports. The reports showed that domestic stockpiles of both crops were lower than expected, as was planted acreage.
The price of soybeans enjoyed a brief rise to over $10 a bushel earlier this week, but then fell back. This was largely the result of the strength of the dollar and concerns about demand from China, which is far and away the largest importer of soybeans in the world. At the same time, analysts are keeping a close eye on the weather. With the ideal planting window closed, persistent rains in some parts of the Midwest have prevented the planting of 3.4 - 3.5 million acres of soybeans, which could boost prices for the oilseed.
Analysts with Deutsche Bank say bad crops are good news for John Deere. Recent crop price momentum is not only a positive for equipment sales, but should also be sustainable, the analysts say, as more wet weather suggests downside risk to yields and supplies of the 2015-16 crop and could help sustain price momentum.
What’s good for John Deere is also generally good for all farm equipment manufacturers and dealers alike.
Historical trends show that there is a close correlation between cash receipts and equipment sales. While it is yet to be seen if the latest increase in prices will be sustained, it will likely help with both farmer and dealer confidence in the mean time.
Dealers on the Move this week include Finning International and Ag-Pro Companies.
Finning International completed the acquisition of the operating assets of the Cat dealership Kramer Ltd. in Saskatchewan. The acquisition combines Finning’s western Canadian operations in British Columbia, Alberta, Yukon, Northwest Territories and part of Nunavut with Saskatchewan.
Ag-Pro Companies of Boston, Ga., announced the acquisition of 11 John Deere dealerships from South Texas Implement and Tractor City in southern Texas to become one of the largest John Deere dealers in the U.S. The company now has 35 locations across Georgia, Florida, South Carolina and Texas.
According to the results of a survey conducted by GE Capital’s Commercial Distribution Finance Canada during Canada’s Farm Progress Show in late June, dealers and manufacturers alike believe the planting season was generally better than last year’s.
Nearly 75% of respondents said the seeding season in Canada was better than or the same as last year. Expectations for harvest are also mostly positive, with 62% saying it will be better than or the same as last year, according to the GE Capital survey.
Howard Shiebler, president of CDF’s Canada business says farmers are cautiously optimistic about harvesting season and may need to upgrade or service their equipment to be ready.
Shiebler says: “Last year we saw a late seeding, which made for a quicker harvest and more equipment demands, so many dealers added more inventory to be prepared for equipment upgrades. Some dealers probably have equipment left from last year and will look to move that product first. However we expect the inventory levels to balance out by the end of the year.”
As more and more farm equipment dealerships develop and define precision farming within their company, one of the ongoing challenges for many is how to turn a profit with this segment of their business.
This challenge is compounded by the current down cycle in the ag market, but dealers nevertheless recognize the long-term value and monetary promise that a robust precision operation can bring.
Fulfilling that potential requires a disciplined sales approach, says Tim Norris, CEO of Ag Info Tech, a precision dealership based in Mount Vernon, Ohio. Norris suggests that a realistic margin precision ag companies should be aiming for in order to be profitable, is 25%. Develop chart with numeric breakdown of 25% margin
An example he offers is for a dealership with annual precision sales of $3 million, and a 25% margin is $750,000. Assuming expenses of around $550,000, that leaves the dealership with a profit of $200,000. Lowering the margin by even 5%, the profits drop to $50,000.
At a time when dealers are emphasizing return on investment more than ever with precision technology, Norris says it’s important to differentiate the financial goals and manufacturer support that comes with machinery sales vs. technology sales.
“A lot of times machinery dealers try to get by on less than 10% and I really think machinery dealers that are involved in precision ag really need to stop and think about their margin and think about what they are giving away sometimes with that sale of a tractor. But one thing machinery dealers have when they are selling a piece of iron is they have the backing of the equipment manufacturers. If there’s a warranty problem, they get paid by the manufacturer. Precision ag dealers typically do not get that help on the backside from that manufacturer and I think that’s something that would really be helpful to us, as dealers if we had that.”
Talking with other precision dealers and based on his own experience, Norris says 25% seems to be the magic number for turning a precision profit, although he acknowledges every dealership should crunch its own numbers and plot a planned-out course to profitability.
On June 29, Art’s Way Manufacturing, a manufacturer of farm equipment as well as research, water treatment and steel cutting needs, announced its second quarter financial results.
Sales for the quarter ending May 31, were down 17.6% while net income was down 6.8% vs. the same period in 2014. For the first half of the year, sales were down 3.9% year-over-year.
Total ag sector sales came in at $6.4 million, a 4.8% decline from the same period in 2014. Year-to-date total ag sales are down about 3%.
Art’s Way Chairman Marc McConnell says they’ve been focusing on managing profitability through the down cycle, and this quarter serves as proof that they are able to do that.
He adds that dealers are having inventory problems and thus are being more conservative when it comes to stocking inventory. Looking ahead McConnell says, “What we found is we have a bit less visibility on what’s going on in the marketplace, because we don’t have the dealer stock or dealers willing to stock very much. So we are preparing for a lot of the units that we sell being straight from the factory.”
The Allis-Chalmers Model U tractor, beginning production in 1929, helped to establish rubber tires through a famous marketing campaign in which the company entered the tractors in races around the U.S. Ab Jenkins famously drove a Model U across the Utah salt flats at 67 mph, an amazing 63 mph faster than typical tractors of the day were ever operated.
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