At the peak of the agricultural crisis in the mid-1980s, in the late summer of 1985, Columbia, Missouri, was filled with rows of used harvesting equipment at a repossessed agricultural machinery liquidation auction. A total of 174 pieces of agricultural equipment were auctioned off that day.
Fast forward to the present, a Bloomberg report claims that second-hand equipment, rather than new technology, is the star of this year's U.S. Agricultural Progress Exhibition. The article highlights that the bids at BigIron Auctions, one of the exhibitors, are the highest ever. While this may be good news for auction companies, it could spell trouble for the industry as a whole.
You might wonder, how bad is it? When agricultural equipment manufacturers start laying off union workers, closing factories, and moving production to Mexico, and dealers are left with an oversupply of second-hand equipment, the trend is shifting rapidly.
Trend Analysis
Many have observed the agricultural economic cycle. This time, despite a sharp increase in input costs, commodity prices have kept pace, and ultimately, agricultural net income reached $182 billion in 2022. However, those good times have passed. By 2024, agricultural net income is expected to drop to $140 billion.
U.S. agricultural equipment manufacturers and machinery dealers set a decade's best sales record in 2021 and continued strong sales for most of 2023. Although sales of new medium and small tractors peaked in 2021, sales of high-horsepower tractors and combine harvesters have remained steady until earlier this year.
The Party's Over
High inflation, high interest rates, and falling crop prices have dampened the recent sugar rush effect on the agricultural equipment industry, signaling the end of the honeymoon phase for the U.S. agricultural machinery market. Over the past four years, the average price of new machinery has risen by 30%. In 2020, the average price of a new tractor was $363,000. By 2023, it soared to $491,800. Since March 2022, the Federal Reserve has raised interest rates 11 times to curb inflation. As a result, not only are the costs of new machines at least 30% higher, but also the loans for purchasing capital goods are 161% more expensive. Now, as commodity prices are falling faster than interest rates or equipment prices, this boom period has come to an end.
Ripple Effects
The Association of Equipment Manufacturers in the United States has stated that in June 2024, sales of new two-wheel drive tractors fell by 16.3% compared to 2023. Sales of combine harvesters have dropped by 31%.
Dealers are trying to stay ahead of the trend. Their response to this economic downturn is a world apart from the previous recession between 2014 and 2015. This time, dealers have been aggressively reducing their inventory of large new second-hand machines. In the first eight months of 2024, the original number of one to two-year-old equipment on the market has increased by 450% compared to 2014 and 2015.
Online auctions, a market force that was in its infancy a decade ago, have become a significant player. Machinery auctions used to be a local affair, but now they are regional, perhaps even national. Even farmers over 65 are bidding on tractors from states away.
The unprecedented number of large new second-hand equipment transactions suggests that the sooner the issue of oversupply is addressed, the sooner the industry will return to a prosperous era. The speed at which this happens will depend on many factors, so it may be wise to cautiously guide the market in the right direction.
Yearning for Certainty
There is much that can be done to bring more certainty to the market, and perhaps the following checklist could address the issue:
- Pass a new agricultural bill.
- Permanentize depreciation incentives.
- Suspend new EPA and climate change regulations.
- Do not increase corporate or individual tax rates.
According to market analysts, the industry may be at the bottom of the roller coaster for about a year. The good news is that, in the long run, all signs indicate that the agricultural manufacturing sector will recover very healthily by the end of this decade.
With the increasing integration of robotics, artificial intelligence, and information systems, the U.S. agricultural machinery industry is expected to grow from $39.56 billion this year to $53.7 billion by 2029.
(Reprinted from Agricultural Machinery News Network)