Making Precision Profitable
In today’s newscast we look at one dealer’s outlook for the fourth quarter of 2015 and 2016, the latest earnings reports from Canadian dealers Rocky Mountain Equipment and Cervus Equipment Corp., how cash rents impact farmers’ equipment purchasing decisions and more.
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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: $36.60 −8.75
With commodity prices down and crop conditions mixed throughout much of the Corn Belt, we wanted to get the dealer’s perspective on farmers’ current buying mood.
We had the opportunity to sit down with Jason Hecht, equipment manager for Birkey’s Farm Store, during the National Strip-Tillage Conference earlier this month. Birkey’s has 13 Case IH stores across Illinois and Indiana.
Hecht says the buying mood has softened, however, he notes activity is picking up as harvest time gets closer.
Looking ahead, he expects a stronger 4th quarter. Right now, farmers have a “wait and see” attitude with what type of crop is out there and warmer weather and higher expectations for higher yields. Hecht says that could likely translate to increased wholegoods sales in the coming quarter.
When it comes to high used equipment inventories, Hecht says dealers need to be creative and think outside of the box with more aggressive finance programs, different discount structures and lookto different markets to reduce inventories.
Because of high used inventories, Hecht says they will need to be more cautious with 2016 wholegoods orders.
Dealers on the Move this week include Camp Equipment and Central Machinery Sales.
John Deere dealer Camp Equipment has acquired Hollingsworth Inc. and will continue to do business from Hollingsworth’s 3 stores in Ontario and Burns, Ore., and Weiser, Idaho, but they will be branded as Camp Equipment.
Four-store Case IH dealer Central Machinery Sales has started building a new 16,000 square-foot office, parts and shop building in Sunnyside, Wash.
Rocky Mountain Dealerships and Cervus Equipment Corp. reported second-quarter earnings late last week. Results for both reflect the ongoing sluggishness of farm machinery sales throughout North America.
Rocky, Case IH’s largest Canadian retailer, saw new equipment sales continue to struggle, falling by 28.3% to $95.4 million in the second quarter.
Sales of used equipment, on the other hand, increased by 6.9% to $75.5 million. Overall inventory decreased by $30.2 million, or 5.7%. Product support revenues rose by 9.8% to $41.4 million.
In his analysis, Ben Cherniavsky, analyst for Raymond James Canada, said, “Organic ag sales fell 16% year-over-year, led by a 33% decline in new equipment sales as Tier 4 price increases, a declining Canadian dollar and dry weather reduced overall demand. Due to the former two factors, buyers are migrating to the used channel, which affected 3% year-over-year organic growth in Rocky’s used ag sales.”
Cervus Equipment, John Deere’s largest Canadian dealer group, generated adjusted earnings of $2.9 million for the quarter. Revenues increased $65.5 million and gross profit dollars increased $10 million compared to the 3 months ended June 30, 2014. Acquisitions contributed $1.3 million of income from operating activities in the second quarter.
Overall, consolidated revenue of $303 million, was up 27.6% year-over-year on growth in ag and transportation, offset by a 19% decline in Construction & Industrial equipment. On an organic basis, consolidated revenues declined 12% year-over-year due to the 4% and 39% respective declines in ag and transportation, according to Cherniavsky.
He added, “Cervus’ inventories remain elevated, rising organically by $38 million year-over-year. This is another persistently unfavorable trend pervading the dealership sector at large.”
As precision farming practices continue to infiltrate more farms, technology had long been an essential part of many strip-till farmers’ operations. Talking with farm equipment dealers, several have cited strip-till products as an emerging opportunity to complement sales of GPS systems and RTK subscriptions.
This notion is supported by the results of No-Till Farmer’s 2nd Annual Strip-Till Operational Benchmark Study. According to the survey of nearly 200 strip-tillers throughout the U.S. more than 79% say they use RTK-level GPS correction, which is nearly a 10% increase compared to 2014.
While many strip-tillers consider RTK critical to the success of their operation, about 8% say they don’t use any type of GPS in their strip-till operation, down from more than 15% in 2014.
Although the pool of strip-tillers not using GPS may be shrinking, dealers are not limited to only pursuing RTK-related sales for these farmers. Variable-rate fertilization is an increasingly popular, yet still relatively new practice that strip-tillers are adopting.
According to the study, use of variable-rate fertilizer application increased from about 31% last year to 36% in 2015. As farmers keep a closer eye on input costs, and payback from the technology investment becomes more tangible, it will be worth watching to see if this percentage continues to grow.
A further breakdown of survey respondents analyzed the top 25% of strip-tillers by corn and soybean yields, and their usage of precision farming practices.
Not surprisingly, about 93% use RTK, well above the overall group percentage. However, only about 34% of the top strip-tillers use variable-rate fertilization practices.
It will be interesting to see if more dealers look to tap into the strip-till market, by either directly selling equipment to farmers, or leveraging their precision relationships to expand the scope of technology being used by those customers.
Lower farm commodity prices aren’t the only thing determining whether or not North American farmers will increase equipment spending during the remainder of 2015 and into next year.
Typically, when farm prices are down, growers reduce or put off equipment purchases before they’ll cut back on farm inputs in an effort to produce positive returns. Of all their major production costs involved in farming, cash rent is the one that currently requires the most scrutiny.
The 2015 growing season is too far along to expect any significant shift in production costs that could affect farm profitability. But looking ahead, Gary Schnitkey, ag economist at the University of Illinois, cites three factors that will need to take place to produce positive returns for farmers in 2016, and incentivize them to increase capital expenditures.
“First, cashflows will need to be reduced even if corn prices are above $4 per bushel,” he says. “Two, cash rent reductions of about 30% from average 2014 levels are needed to generate farmer returns roughly the same as from 2000 to 2005. Third, keys to watch will be announcements of 2016 input prices by seed, fertilizer and chemical input manufacturers. If these prices are at 2015 levels, adjustments to lower commodity prices must predominately come by lowering returns to farmers and landowners.”
Schnitkey says, “If 2016 returns hold as projected, farmers will have a third-straight year of losses on farmland that is cash rented at average levels. Cash rent negotiations for 2016 rents will play a large part in determining farmer returns for 2016.”
With this scenario, Schnitkey expects machinery depreciation for corn in 2015 to hold constant at $69 per acre. “Stable depreciation assumes that farmers reduce machinery purchases in 2015, leading to a non-decrease in machinery depreciation in 2016,” he said.
In 1949, Case built its first forage harvester, the Model C. With PTO drive, the machine was listed for $812 and the addition of a V-4 engine raised the price to $1,470.
The Model C was useable with three different attachments. 150 Years of J.I. Case by C. H. Wendel says the mower attachment for the Model C was used for green chop, which the book defines as “mowing and ensiling the hay crop in a single pass.”
A pickup attachment could be used with cured or partially cured hay and a row crop unit could be used to cut standing corn. The Model C was produced until 1955.
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