Commodity prices dipping to their lowest, recovering inventories of farm equipment and high interest rates are contributing to a pile up of new farm machinery at dealerships; and it isn’t expected to move quickly anytime soon. Early projections forecasted a decline in 2024 sales and anticipated the spending habits of farmers to match agricultural economic trends. Inventories have only increased and interest rates haven't fallen yet making this traffic jam of equipment a reality for the next few months if not years.
Why Isn’t Farm Equipment Selling?
Farm equipment sales are at the mercy of the farmer’s cash flow. With corn and soy prices dipping to their lowest in the last three years, farmers are struggling to break even let alone consider big purchases. Pandemic relief funds infused farm incomes two years ago which helped to spur a boom in the ag sector, and at the time, left equipment manufacturers scrambling to get tractors to the farmers who were more than able to pay for new machines. Farmer’s banking on another robust year were caught off guard when commodity prices dipped and as a result equipment sales have slowed significantly. Those intending to invest in brand new, state of the art tractors and combines have had to reconsider their purchasing options, and most are not buying new.
At the same time, manufacturers pushing to restock inventories after pandemic obstacles, and hoping to ride the same commodity boom wave, plowed headfirst into the cash flow bottleneck farmers are stuck in. Where only a year ago farmers were waiting for equipment to arrive and manufacturers couldn’t keep up with demand amid delays, today dealerships have little space to house machinery that just isn’t selling. The average piece of equipment comes at a price tag of $400,000 and if it doesn’t move off the floor, dealerships are forced to foot the bill.
Interest rates have stayed high and even farmers who can afford to buy new are choosing not to because of these rates. Manufacturers and dealerships are not anticipating an increase in sales for at least 18 to 24 more months. Meanwhile, the 7% interest rate is being absorbed by dealerships who are spending between $28,000 and $35,000 a year per unsold machine. They are looking to move inventory any way they can rather than pay to watch equipment sit.
How is the Farm Equipment Sector Responding?
Dealerships have been forced to stop orders of new equipment from manufacturing companies as they are at full capacity. High horsepower tractor inventories grew by 107% over the last year and combines are following suit with an estimated 7,600 left unsold as of May. As buying slows these numbers are expected to increase, prompting dealers to get creative.
Between 2014 and 2020 the industry experienced a similar imbalance of supply and demand. At that time dealerships utilized auctions to move inventory faster. It’s likely we will see this trend resurface as dealers look at liquidating current inventory to bring in new equipment. Farmers can expect to see brand new equipment up for auction as dealers are willing to sell at lower prices rather than risk getting stuck paying high interest rates on equipment sitting in warehouses and lots for another season.
Farmers who need new equipment to tackle farm challenges or maintain sustainability goals are not completely out of luck. Lending institutions are working to make leasing options more varied and realistic for the current economy. Buyout leases, purchase on termination leases and fixed price purchase options are all ways that farmers can get their hands on new and needed equipment while navigating the higher prices and interest rates. Leasing can make the monthly payment on a piece of farm equipment half of what it would be if the same equipment were to be purchased outright. Maintaining cash flow while still meeting farm needs will likely make leasing the most popular option.
Manufacturers are working to create a buffer for dealerships by offering their own financing options. They are excited about new technologies aimed at sustainability and know that farmers need the advanced equipment to combat water management and soil health goals. Many are willing to deliver machinery with no money down for the first nine months. It creates a scenario where machinery could get used for a harvest season before any money needs to change hands. In theory, harvest income would begin to cover the monthly payments. While it’s not without risk, it's a strategy that would give dealerships extra wiggle room as they work to move inventory off their premises.
More Challenges Ahead
Used farm equipment is caught up in the same supply and demand congestion. If large inventories of brand new machinery are sold at auction for the same price as used tractors and combines, the demand for late-model equipment will dry up. Farmers might be leery of the interest rates, but in a liquidation situation if a new piece of equipment can be purchased at the same price as a used one, they could be persuaded to upgrade. If buyers are following the biggest discount then the used market will be left in a lurch until supply and demand level out again.
Playing a small part in the dynamic is the consolidation of farms. There are less individual farms buying their own equipment. Small farms are being purchased and added to existing operations or several small farms agree to share equipment to decrease the financial burden of purchasing equipment. Both situations have contributed to fewer sales.
The industry at large seems to be looking farther ahead as they anticipate demand. In the haste to rebuild inventory they outpaced consumer ability to purchase high ticket times. Interest rates will fall, and commodity prices will rise, as is the cycle of economies. The farm equipment sector seems to understand that even if those two variables were to change tomorrow, it will take months for farmers to regain financial stability and feel confident making large equipment purchases. And likely even longer before supply and demand level out again.
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