Ageing agricultural machinery brings hopes of a market turnaround
Agricultural commodity markets will probably stay depressed longer than tractors can keep rolling.
After struggling with shrinking sales and revenues since the 2013 peak, the biggest names in agriculture equipment finally saw signs of changing fortunes last year. Deere & Co, CNH Industrial and AGCO Corp. all reported in the black, with sales in their agricultural machinery divisions lifting an aggregated 10 percent from a year prior.
Commodity prices delay equipment renewal
The key culprit in recent years has been commodity prices, which started easing from the 2011 highs in the following years, and then contracted by roughly a third in 2014 and 2015 alone.
Meat and dairy prices then started advancing nicely, while stubborn crop surpluses and elevated inventories have continued to put a lid on grain prices. While farm financials have strengthened, farmers still find themselves in a difficult economic situation in many parts of the world.
How did the machinery makers turn sales around last year?
With farm fundamentals still under pressure, OEMs are once again seeing demand driven by an impetus from customers wanting to replace equipment. Some farmers may try to squeeze some extra life out of their tractors and combines, but increasing numbers are now looking to reap the many benefits of up-to-date machinery.
As equipment commissioned during the buoyant sales years of 2011 to 2013 begins to age, considerations around maintenance cost, downtime and staying within the warranty period are emerging on both sides of the Atlantic.
Replacement and then some
But replacement these days is about much more than just switching out your tractor or combine with a shinier version. Technological innovations are being introduced to the market in increasing numbers, and while precision farming tools are already widely used in North America and parts of Western Europe, distressed farmers are welcoming anything that can help reduce their break-even costs further.
Improved precision technology and other productivity enhancers in soil preparation, seeding, crop management and harvesting offer much needed gains across the entire value-chain.
Uncertainty blights future predictions
A sustained recovery in agricultural equipment is far from assured. With corn, wheat and soybean markets continuing to be weighed by excess stocks and supply, a significant machinery upturn seems anything but likely.
The U.S. Department of Agriculture projects a modest decline in U.S. farm income in the coming year, following the two percent gain in 2017, while the prevailing belief is that European farmers will be moderately better of as a result of above-average margins in dairy and livestock.
Still, the industry has signalled belief that last year’s momentum will extend into 2018, with Deere & Co, CNH Industrial and AGCO Corp. all having issued flat or improving sales guidance in every market region this year. And perhaps even more encouraging is the expectations of a high-horsepower equipment turnaround in North America, the market segment facing the biggest challenges in 2017.
But while the Tax Cuts and Job Acts sparked some optimism among U.S. farmers, the recently imposed steel tariff did the exact opposite in the machinery sector, adding to the uncertainties over the year ahead.
Machines will eventually need to be replaced
The only thing that is certain is that the machine population keeps getting older. With everyone in agreement that current sales numbers are well below mid-cycle levels, maybe the light at the end of the tunnel is not the train after all.
Farm Equipment, Big 3 Finish Year in Growth Mode; Looking at Solid Gains in 2018, March 2018
United States Department of Agriculture Economic Research Service, U.S. farm sector financial indicators, 2011-2018F, February 2018
CEMA - European Agricultural Machinery Industry, ‘Farming 4.0’ at the farm gates, Digital Farming: what does it really mean? February 2017
Food and Agriculture Organization of the United Nations, FAO Food Price Index, March 2018
United States Department of Agriculture, World Agriculture Supply and Demand Estimates, March 2018