Pinching Pennies – Are farms finally starting to pull back from shiny new toys?

Depreciable assets do not make you money. The end.

 

In a recent article in the Western Producer, we may have finally identified the first brick in the wall coming down. The equipment manufacturers are predicting a drop in sales for the first time since the pandemic hit and we all had to order implements two years in advance. 

 

I believe you could order a new combine today and have it in the yard before harvest. That is a big change from two years ago when we had them delivered late and 18 months after ordering.

 

The editorial went on to state that lower expected farm income and the current commodity markets for grain and oilseeds are the determining factors. My question is, with canola currently hitting close to $15 (per bushel) for the fall and wheat approaching $10, are we really blaming commodity prices that are considerably above the historical average? If that were the case, why didn’t the manufacturers go bankrupt when canola was $9, and wheat was $6?

 

The truth is that most farms we work with are showing a very high probability of profit if we get moisture in Western Canada. And being that I get to write this two weeks after the original article, we now have most of the region under more moisture than they have seen in the past two years. 

 

I don’t believe equipment sales are slowing because of commodity prices, I believe they are slowing because farmers are finally pushing back.

 

Price Increases

 

I will be the first to admit that I believed farmers would have stopped buying sooner than they did. When our data started showing an increase in combine prices of greater than 100% since the pandemic started, I was floored by the number of deals we were still running numbers on. 

 

Not just the fact that it wasn’t economical from a cost standpoint, but the fact that the inflationary adjustments to equipment had made a million-dollar implement just another run-of-the-mill day. It is now like spending a hundred thousand on a half-ton truck, just the way it is. 

 

The last rumour I heard was that the large dealerships were predicting another 5% or more increase in the cost of machinery going into 2024 and beyond. This is already on top of the massive increases we have seen over the past five years. 

 

Do I believe this will have the large farms pull back on annual rollovers with multi-discounts? No. 

 

However, I can say from personal experience we held onto our machinery last year and unless something changes we would have no problem running it again. We have the data to show that repairs, downtime, and all those other excuses for upgrading do not have any legs to stand on. The truth is, unless the numbers work, we are stingy when it comes to the quality and the quantity of machinery that we run.

 

The number one item I see as slowing down machinery sales into 2024 is the price and sticker shock of what’s to come. I have seen some news lately about manufacturers tying price to horsepower when selling new larger implements (such as 800 hp tractors). 

 

What happens when you don’t use the extra 200 hp because there is nothing big enough to need it? Do we get a rebate?

 

Interest Effect

 

To be fully transparent, the other factor that holds us back from making any machinery deals as of late is the change in interest. We finance our machinery long-term, because we don’t want equity in a depreciable asset, so the rate of interest has a large effect on the cost per acre from our machinery holdings. Going from a 3% rate to a 7% rate just to get into a new implementation has a large cost to our organization and bottom line. I really don’t need the massaging seats that bad.

 

I believe the second largest holding force on equipment sales is the interest rates. We are now starting to see dealerships offer 0% periods again, and I believe that this area is one where we may get the most movement this year if equipment remains sitting on dealer lots. For us, this is a huge positive, as most of our cost is in the interest of the debt, and not just the amortization or cost of use of the equipment.

 

Until (or if) we start seeing rates start to subside, I believe that the FCC report identifying close to a 20% drop in equipment sales could be correct. On a $1.5M combine, the difference over a five-year loan period from 3% to 7% comes out to around $180K (or $36K per year). For Joe Public this could be a full year’s salary, for a farmer this is the difference between having plastic on the seat or not.

 

Farmer Mentality

 

My last comment on the equipment pricing is around business mentality. I think farms pulled back this spring because they saw markets start to drop and low moisture probability. However, I now see the markets recovering with strong fall prices while most of Western Canada is talking about too much rain. 

 

The accountant in me wants to believe that the farms will stick to their original plans and limit the capital budgets going forward. However, the realist in me also knows that we are one rain in July away from the dam breaking and equipment sales building right back up to 2023 levels. 

 

We have said before that “farmers have short memories”. This is none truer than when it comes to equipment as it takes very little pressure to convince ourselves that a three-year-old combine is starting to have a lot of repairs, or that drill just isn’t quite doing as good of a job as it did in year one. 

 

I get numerous phone calls per year having these same discussions, so it would be ignorant of me to believe that small changes in producer mindset around 2024 profit will lead to an increase in equipment sales back to record highs.

 

In the end, producers will do what they have always done. Most that roll equipment every year will continue this trend, and those that hold on to used implements will continue to do so. I believe in the past year with strong profits and cash flow many that didn’t upgrade made the jump rather than having a long-term capital plan. We need to remember that most of the industry still is using the cash basis and as such when cash is good, spending goes up.

 

For those who are on the fence regarding capital, I subscribe to the Warren Buffett seven-day purchase rule. When you want something, put off buying it for seven days. Most times, you walk away as you really didn’t want it to begin with.