A New Era: The Ag Equipment Industry's Sugar High Is Over - AgWeb

One of my first story assignments as an agricultural journalist was covering a liquidation auction of repossessed farm machinery in Columbia, Missouri.

It was late summer 1985, and the 1980s farm crisis was at its zenith. I can still envision the endless row of used corn heads across the length of the fairgrounds. In total, 174 pieces of agricultural equipment hit the auction block that day.

This was certainly not the “feel-good” story I had envisioned to start my journalistic journey in the field of agriculture, but I learned about our industry’s fragility.

Fast forward to today, and I’m reading a story by Bloomberg news that proclaimed used equipment, not new technology, was this year’s star of the Farm Progress Show. The article highlighted that BigIron Auctions, a provider of used farm machinery and one of the show’s exhibitors, had its biggest-ever offering. Although this may be good news for the auction company, it is likely a prophecy of bad news to come for the rest of the industry.

You may ask, how bad? When agricultural equipment manufacturers start shedding union line workers, shuttering plants and shifting factories to Mexico, and there’s a glut of used equipment covering dealer lots, you know the tide is quickly turning.

What Goes Up Comes DownMany of us have observed farm economic cycles. This time, despite the sharp rise in input costs, commodity prices more than kept pace, and ultimately, net farm income tallied $182 billion in 2022. Those good times are in the rearview mirror, though. For 2024, projected net farm income drops to $140 billion.

Not surprisingly, farmers bought fresh paint during the boom period. U.S. farm equipment manufacturers and machinery dealers recorded some of their best sales in more than a decade in 2021, and strong sales continued through most of 2023. Although sales of new small- and medium-sized tractors peaked in 2021, sales of bigger horsepower tractors and combines held their own—until early this year.

The Party’s OverThis most recent sugar high for the ag equipment industry was foiled by high inflation, high interest rates and falling crop prices. New machinery prices ramped up 30% on average in the past four years. In 2020, the average price of a new tractor was $363,000. In 2023, it skyrocketed to $491,800.

Since March 2022, the Federal Reserve has raised the interest rate 11 times to curb inflation. So not only does that fresh paint cost at least 30% more, but also the money borrowed to purchase capital items is 161% higher. Now with commodity prices falling faster than either interest rates or equipment prices, this boom time hayride is over.

The FalloutThe Association of Equipment Manufacturers says June 2024 sales of new two-wheel drive tractors were down 16.3% versus 2023. Combine sales were down 31%.

Farm Journal’s machinery analyst Greg Peterson, who leads the popular online platform Machinery Pete, says BigIron Auctions’ expanded presence at Farm Progress is a sign dealers are trying to get ahead of the train. He notes the night-and-day difference in the OEM-dealer response to this downturn compared to the previous one in 2014 to 2015. This time around, dealers have been aggressively paring down large late-model used inventory. In the first eight months of 2024, the market saw a 450% increase in the raw number of one- to two-year-old equipment units taken to auction compared with ’14 and ’15.

Peterson projects used equipment values will continue to deteriorate in the short term. However, the change in those values may not rival the percentage drops seen in the previous down market. Why? Online bidding.

It is a market force that was in its infancy a decade ago. Machinery auctions used to be a local affair. Now, they are regionalized, perhaps nationalized. Even 65-year-old-plus farmers are bidding on tractors being sold eight states away.

Despite the unprecedented number of large late-model used equipment transactions, Peterson points to a potential silver lining in seeing such a quick spike. The sooner the glut of inventory turns, the sooner the equipment industry will return to brighter times. How quickly this happens is going to depend on a lot of things, so it may be prudent to nudge the market in the right direction.

Craving CertaintyWith the politics of this election behind us, there’s a lot that could be done to give the marketplace more certainty. I made a “to-do list” for our newly elected officials to follow to address this issue.

According to market analysts, we will be at the bottom of this rollercoaster ride for the next year or so. The good news is that long-term, all signs point to a very healthy recovery of agricultural manufacturing by the end of the decade. As robotics, AI and information systems become increasingly integrated, the U.S. ag machinery sector is poised to grow from $39.56 billion this year to $53.7 billion in 2029.

Of course, hitting such numbers depends on how rough the road is financially between now and then. All I know is we do not need history repeating itself. The last thing I want is to have one of the last stories of my journalistic career mimic the heartbreaking one I started with nearly 40 years ago.