As of this writing, soybeans have hit the 2013 price, corn and wheat cost over $ 7, and there are drought conditions for the summer. Second crop corn in Brazil is under heat and drought pressure during pollination, threatening bushels. Global demand is still high and global stocks are low. Everything the world needs is manufacturing, freight or raw material shortages, rising costs, and increasingly remote delivery dates. Add these ingredients together and you have a perfect storm for much higher commodity prices.
As the farm equipment industry slowly moves towards an economy similar to 2012, I ask myself, “Did we learn anything from the last go-around?”
There is no doubt that the next few years will be full of machine upgrades. Sales of new equipment picked up, opening the door to more stock available at the end of the day. More new equipment is on order than in previous years. Any new stock on the lot has been sold for a long time, and if new equipment appears, it is retailed from the factory.
Used equipment sales have also turned around and revived the saturated markets for 2012-2014 models. The Last Hour Market, a small brush fire at the end of 2020, is now a full pasture fire blazing red! As of January 1, just over 700 combines have been removed from retail websites until April 1. Of the 700 combines phased out, more than 600 units were phased out between March 1 and April 1. that means over 600 used combines that we have sold without exchange! Most of the work was done in March, and the trendlines show that there is not much to slow it down. This is the most significant news since 2014. Sales increase, machines move and batches empty, leaving plenty of room to reload the wash cycle of used equipment.
The ecosystem of the farm equipment industry depends on the constant influx of new equipment. The used equipment generated guarantees an income from future parts and service activities. The higher the rent, the higher the absorption rate and the better a dealer survives economic downturns. I have been to several countries where the flow of equipment is constant. Only the extreme ends of the spectrum exist, very old machines or very recent machines. As a result, the parts room at these dealerships is one-third the size of the parts rooms we see at North American dealerships. These dealerships depend heavily on the sale of new equipment and in many cases have little or no when it comes to used equipment for sale.
For the farm equipment industry ecosystem to function, there must be a balanced wash cycle. Each new machine sold will require a minimum of 5 to 6 used washing machines. As a general rule, whether new or used, every movement through the wash will generate a trade until “Cash No Trade” is reached. Each movement through the wash has a very distinct purpose. Interrupt any of these steps and inventory issues will arise.
An interruption at the start, middle or end of the wash cycle has the same impact on inventory. In 2008-12, the interruption of the wash cycle was at the front. The first and second professional buyers went to new, and the number of late models and short-time machines accumulated on the dealer lots. With this change in buying habits, we were now relying on the third and fourth commercial buyers to buy the latest generation equipment on short notice. For several reasons, these buyers are not able to purchase these machines.
During this period, there was a “Leap Frog” effect. For example, a customer owned a 50-series combine and traded it in for a new 70-series combine. Typically, the 50-series customer would trade in for a 60-series combine , and the 60-series combine would trade in for the new or used 70-series combine. The frog hopping is a disturbance and causes a problem in the middle of the wash cycle.
In a regular trade-in cycle, this customer is looking to purchase the 5-7 year old combine, which is in the middle of the wash cycle. If that buyer is not available, the front end of the wash cycle spins quickly and steadily, but the middle and end is an obstruction in the funnel that is difficult to remove.
The end of the wash cycle is an animal all its own. Buyers at the end of the wash cycle do not have a defined purchase cycle. They tend to buy out of necessity rather than the need to upgrade. They also tend to keep a part longer and can run the machine for 20 years. What makes the end of the wash cycle work well is that almost all buyers participate in the purchase of the 5th and 6th exchanges, making the number of potential buyers endless.
Every step of the wash cycle counts. Each time one of these steps is interrupted, the ripple effect amplifies each subsequent step before or after. If the sale of new equipment exceeds the capacity to sell used equipment, 2014-2016 will repeat itself. On the other hand, if sales of new equipment decline or slow down, intervals in the wash cycle create voids, not allowing movement through the wash cycle funnel. The more metered the farm equipment industry is in this next cycle of recovery, the better off it will be in the next cycle of decline.