Farm equipment sales typically follow farm commodity prices. When farmers can sell their crop at a higher price, naturally they have more money to upgrade their equipment to become more efficient. It’s simple economics.
But what happens when the companies manufacturing new, cutting-edge tractors, planters and harvesters can’t build farm equipment because a global pandemic shakes up manufacturing supply chains? What happens when there’s a shortage of rubber for tires, steel for frames and axles, and tiny microchips that control performance? That’s a different level of economics that farm equipment manufacturers, farm equipment dealers and farmers themselves are all trying to understand.
Demand side: Pent-up demand for farm equipment from farmers
With prices for corn, soybeans, wheat and other commodity crops remaining stagnant over the past six years, farmers have been hesitant to make big purchases like new tractors, planters and combines. Instead, many have opted to extend the use of their older equipment. But with commodity prices coming back stronger than expected over the past year, farmers are now in a better financial position, allowing them to update their equipment. In fact, according to reports by the Association of Equipment Manufacturers (AEM):
- Tractor sales are up almost 26% through May of 2021.
- Combines sales are up 13% compared to the same time period in 2020.
- Sales over the past year have been above the five-year average, indicating farmers are now acting on pent-up demand for equipment.
Internationally, ag equipment unit sales are expected to continue rising around the globe through at least 2023. After growing 5% internationally from 2019 to 2020, most regions of the world are expected to continue seeing growth. For example, increases in tractor sales in the first five months of 2021 compared to 2020 are up in the following countries:
- Canada (Up 52%)
- Germany (Up 34%)
- United Kingdom (Up 21%)
Farm equipment sales could be even stronger were it not for struggles manufacturers are facing in keeping up with production. Many are still playing catchup due to COVID-related factory closings and production slowdowns due to labor shortages. But possibly the biggest unresolved problem for equipment manufacturers is disrupted worldwide supply chains that are making it hard to acquire the components needed to build the equipment.
Supply side: Supply chain disruptions that slow manufacturing
Most farm equipment requires hundreds of component parts made of steel, rubber, glass, plastic, electronics, lubricants and more. The average tractor itself is made up of more than 1,700 different components. Over the past few decades, manufacturers, looking to improve cash flow and be more efficient with their resources, have moved toward a just-in-time delivery of raw materials and component parts from their suppliers. This works great as long as manufacturing supply chains are predictable. But if even one part of the supply chain fails, manufacturers aren’t able to deliver product.
COVID-19 has been the biggest catalyst to supply chain breakdowns for farm equipment manufacturers over the past 18 months. Factories that supply raw materials and components have had to shut down or curtail production significantly because of government interventions and a labor force that has juggled temporary layoffs, illness and family needs. Steel, which makes up approximately 70% of farm equipment, saw a decline to 50% production capacity early in the pandemic according to the American Iron and Steel Institute. Less steel leads to less capacity to build farm equipment.
More recently, decreased production and increased competition for microprocessor chips from other industries —including the auto industry, video games and electronics suppliers — have impacted farm equipment. As farmers have adapted to precision technology and telematics — the computers that help them operate — their equipment has become more reliant on electronics. In a recent poll by Farm Equipment Magazine, 88% of respondents expressed concern that the lack of chips would cause farm equipment inventory challenges. To add to the concern, Intel’s CEO was quoted as saying he expects it might take 6 to 9 months to boost production of the chips and that the current shortage could extend for a couple years.
Rubber, used in tires and belts, is also seeing supplies tighten as a result of a variety of issues, including production challenges in Asia where most of the raw material is produced, a lack of shipping containers globally and this spring’s bottleneck in the Suez Canal. China’s efforts to stockpile rubber in anticipation of a shortage has also caused disruptions that will likely extend into the short term.
Factory fires and hurricane Laura caused large petrochemical facilities in Texas and Louisiana — some of the world’s biggest producers of petroleum-based plastic inputs — to reduce production. The abnormally hard winter freeze across Texas also shut down electric utilities for weeks, causing a shortage of raw materials used by companies that produce plastic parts for farm equipment. As a result, normalized production levels for plastic parts and components could take months.
What equipment dealers and farmers should consider
With farm equipment facing a shortage due to parts scarcity that could extend for months and possibly more than a year, farmers and farm equipment dealers are starting to make changes that will help them into the future.
“I think the best dealers are thinking in advance rather than waiting to make the sale,” said Ken Whitelaw, global head of Program Management, Food and Agriculture at DLL. “They’re managing the relationship. It’s not just a transaction anymore. Dealers are changing their mindset and thinking about the needs of their customers further into the future and how they can continue to be involved along the way.”
In many cases, dealers now are working with customers who won’t see the equipment they want for six months or longer. Dealers are looking for creative ways to facilitate a deal — including taking advantage of early-order programs offered by manufacturers and working on creative trade and financing options.
“We’re finding ourselves helping dealers and farmers book deals before the equipment is delivered,” said Whitelaw. “It helps the farmer with peace of mind that their equipment is on order with a delivery date, and it helps the dealer because it gives them the opportunity to sell their customer’s trade sooner than they normally would.”
Taking a new look at technology
From a farm equipment dealer standpoint, the past year has seen the use of technology accelerate both facilitating sales and developing customer relationships.
“We literally had customers buying tractors from dealers that were physically closed due to local government mandates,” said Whitelaw. “Everything went online. Farmers could download their contracts with dealers and dealers could do a socially distanced delivery. Dealers learned that technology could make it easier and more convenient for the customer.”
Technology and the drive to build customer relationships has also opened the eyes of dealers looking to provide a deeper level of service.
“I think the technology thing is really key. If I’m running a dealership, I’m now asking myself, ‘How do I position myself to service my customers?’ — whether I’m the seller of the equipment or not,” said Thomas Casey, vice president of Asset Management, Food and Agriculture at DLL. “It’s one thing to sell the asset, but can they play a bigger part from a service standpoint? How can they stay connected to the equipment and the customer and be a service provider on the technology side? I think the current environment has just opened people’s eyes to embracing technology.”
In the future, that might mean helping customers consider options that are not as common in today’s farm equipment market, but it may also evolve in the near future. With dealers lacking farm equipment inventory today, manufacturers are likely to encourage dealers to do a better job of stocking equipment as production levels improve and not rely as much on being able to order from factory stock and have it delivered in a week. Additional inventory on dealer lots may also create different revenue streams.
“There’s never been much rental and rental fleet activity in the ag industry,” said Casey. “I think maybe it will be a reactionary thing, but I see that as a bigger opportunity for additional revenue for dealers and possibly manufacturers.”
With the jury still out on how long it will take for supply chains to get back to normal across the globe, the impact of the disruptions over the past year have brought light to opportunities for ag equipment dealers and manufacturers. Which of these opportunities will stick around over the long term is yet to be seen.
“One of the advantages of being a global company is we have a footprint across more than 30 countries,” said Whitelaw. “In times like these, where things are unpredictable and changing, having that global perspective can be an advantage. Seeing how supply chains are working. Seeing how dealers and manufacturers are adjusting in different countries. Those are insights we can bring to our customers, along with solutions to support them, that can put our customers at an advantage.”
