By: Rob Wertheimer
Despite the obvious risk of soybeans piling up under tariff pressures, we’re not seeing any real signs of strain in US ag equipment. We track some datasets that other folks may not have, and generally speaking they are supportive.
- On financing, we look at how much equipment is financed by the OEMs, versus bought with cash or bank credit. Relying more on OEMs is something we have viewed as a sign of strain.
- We also look at lending versus leasing. As the bubble popped a few years back, leasing rose and lending fell, in both new and used equipment. Again, we saw that as a strain indicator.
- Used equipment pricing is a new indicator we have been using the past few months, with data from Sandhills Publishing. If we’d had that back in 2016, we would have seen a bottoming in used ag prices, at a time when we were still too negative.
Right now, leasing activity looks normal, not rising. In 2014-2016 OEMs increasingly intervened to support sales and used pricing (that’s our view, not the OEM view, but we are very happy to defend why we think it is the case). Through 2018, leasing has been falling and lending has been rising as a portion of the mix, that’s not what we would expect to see if farmers are highly worried about soybeans, farm debt, and future used pricing.
OEM financing remains elevated, but not changed. On our data at least, farmers of a few years back used cash and bank lines of credit a lot more often than they have the past 2-3 years.
And used equipment pricing is ok. We look at a lot more than we publish here, and realistically there’s volatility in the numbers. Generally speaking, used pricing recovered impressively in 2016, and has at times bled down a little bit since, but we see no sharp down moves. There is some material downward move in 2-3 year old machines, i.e. the age coming off lease.
Our overall ag thesis is that there is too much equipment that still has 5+ years of aging out before a natural start to a next cycle. Most folks assume we are at a trough and seeing a strong replacement cycle. Horsepower sales of combines and tractors sales today are not at trough, in fact are only 10% below the 30 year average, including supercycle years, and 10-20% above the non-supercycle level. Our analysis points to tractors lasting 10-15 years with no material decline in productivity. The total market is still oversupplied. The upcycle that started in 2007-2008 may be starting to age out a little. But the supercycle of 2011-2014 is still sitting out on farms. Combines harvest more as yields grow, and so there is a need for more power there. But if modern farming needs more tractor power to operate, we haven’t found a reason yet, and other regions are using less, not more.
We do like to keep an eye on the data, though, and so far our differentiated information keeps pointing neutral, not negative.