As grain prices have fallen since the latest peak in 2012, many farmers, out of necessity, have cut back on capital expenditures, including machinery. Today, you’ll find that producers are not only being careful in what they purchase, but also how they purchase.
Recently, some economists have said cuts in capital expenditures could be in excess of 60% of spending from just a few years ago when grain prices were on the other side of the spectrum.*
“Higher capital expenditures are one of the main factors leading to higher machinery-related costs that are occurring on grain farms. Now that crop revenues have declined, capital expenditures on grain farms also need to decline,” says University of Illinois Extension ag economist Gary Schnitkey. “In addition, other measures may be required to lower machinery-related costs.”
Machinery Is Still Moving
Farm equipment is still moving from dealership lots around the country – a sign that general buying cuts may not be happening at levels previously projected. Instead, what we’re seeing is more of a shift in what producers are buying.
“Right now, the sentiment is producers aren’t buying anything, but there’s still activity in the market,” says Brian Schrock, AgDirect Territory Manager in Missouri. “But, they’re buying essential items and should look at purchasing technology that can help them be more productive and reduce input costs.”
Benefit Of Being The Low-cost Producer
Cost containment may be the name of the game for producers in today’s machinery marketplace, and Schrock says that’s happening in several ways. First, if a producer is in a strong capital position, there are ways to leverage that to cut down your iron costs, both in what you buy and how you buy it.
“Whereas a high-cost producer may not be in the market in a couple years, a low-cost producer is going to have opportunities to buy equipment from either a dealer or at auction because he doesn’t have significant debt to service or high land-use cost. That’s one area where we see some opportunities,” Schrock says. “Maybe that producer doesn’t want to lay out cash on a new vertical tillage tool, but will finance a $50,000 used machine on a five-year note. Farmers with liquidity are taking advantage of these lower equipment prices.”
Price Responses Vary
Different sectors of the used machinery marketplace are responding to grain prices in varying ways. A producer looking for a tractor, for example, may find some sizes and models are falling sharply in price, while values are holding steady for other used models. Can a producer buy a different machine than he or she ordinarily would if it means capturing a lower relative price?
“Mid-horsepower and smaller tractors are not losing value, while bigger tractors are falling off. Therefore, there are quite a few of them out there. If there’s a big flood of used models on the market, everything else drops accordingly. If dealers are sitting on 2,500 units of combines in aggregate across the nation and there’s a push to trade, it’s going to really drive down their value,” he says. “There’s potentially going to be a good influx of some equipment coming into the market from the manufacturers with equipment coming off lease. They don’t want to sit on that equipment and will likely offer it at reduced values to generate cash.”
Just as overall machinery inventory will continue to change, so too will the way you can purchase that machinery. Higher-inventory machines will see prices fall, but financing options could see an uptick. Some of those options could help producers retain more cash when they pay only for the value they glean.
“If a producer is going to lease a piece of equipment and use 50% of the value of that machine in a three-year time period, he or she is only going to only pay for that use. There are options for financing equipment to reduce the payment and maintain cash flow,” says Schrock. He encourages producers to connect with AgDirect through their equipment dealer or direct to learn more about specific financing options. “The manufacturers are making adjustments to their lease programs to manage risk and reduce the number of machines that are turned back in at lease maturity.
“A lower payment means there’s a higher residual, so at the end of three years, that tractor’s only going to be worth 60% of what it’s worth today. We’re seeing the manufacturers make some changes to residual values as well,” Schrock adds.
Stay In The Loop
With so much variety in how different sectors of the machinery market are responding to lower grain prices, it can be tough to forecast how those trends will continue to unfold. One thing is clear, however; buying habits are changing not just because of the markets involved, but also how buyers are staying informed about their marketplace.
“I think with today’s technology and communication, farmers are talking and listening to a lot more people, they’re smarter about markets and they’re out there taking advantage of opportunities to buy,” Schrock says. “Buying habits change so much quicker than in the past.”