A New Approach to Sourcing Ag Equipment and Parts

Farm equipment sales traditionally follow farm commodity prices. As prices rise, farmers invest more to upgrade ag equipment and become more efficient. But the pandemic and geopolitical tensions have altered the current market dynamics.

The market is very volatile with end user producers potentially able to increase their revenues for 2022 and most certainly for 2023 depending on when they decide to sell their crops given the material increases in commodity prices. As an example, as of June 2022, corn futures were at $7.73, soybean futures were at $17.44 and KCBT wheat futures closed at $11.62, which are all considerably higher than prices quoted during June 2021. In addition, Ukraine and Russia are historically two of the world’s largest wheat exporters and now that shipments are limited, wheat prices could further increase.

This increase in revenue is largely offset by the higher cost of fuel and inputs like fertilizer along with the rising interest rate environment. Fertilizer costs have roughly doubled from a year ago as the war disrupted the flow of supplies. Also, diesel is currently at a national average of $5.49 per gallon. Last year, diesel averaged $3.29 per gallon. The increase is largely due to sanctions placed on Russia and the subsequent supply restrictions. However, despite the volatility we have seen the demand for Production Agriculture equipment remain rather strong so far during 2022. The ability for farmers to proceed with their desired equipment investments has been further complicated by challenges with ag supply chain.

You cannot count on the machine or parts being available at the dealership. “For anybody who thinks there isn’t going to be a shortage of something this summer, they really haven’t been paying attention,” says Bret Julian, director of sales at Vermeer Forage Solutions.

Change Your Historical Mindset
Farmers have historically relied on the used ag equipment market to hedge and fill gaps when a piece of new machinery could not be economically justified. Farm equipment was seemingly always readily available. This led farmers to develop a historical pattern for equipment purchases during the season it was actually needed. Farmers now need to realize this historical pattern is no longer relevant. This is going to require a mindset shift. “The danger is relying on the past way of thinking,” says Greg Peterson, owner, Machinerypete.com, a marketplace for buyers and sellers of used farm equipment that offers farmers a vast selection of equipment listings in one place.

Finding equipment is not simply going to be a decision between purchasing new or used. “Even if you want to buy new equipment now, most of it is already pre-sold for 2022 and there is historic tightness with used equipment on dealer lots all over the country,” says Peterson. “Used inventory levels are at an all-time low at dealership lots across North America.” This is a global problem as manufacturers are facing component shortages that limit new unit shipments as planting season kicks off in the northern hemisphere and harvest season kicks off in the southern hemisphere.

To illustrate this point, Peterson compared the number of tractors that exceed 175 horsepower for sale at MachineryPete.com versus three years ago. “There are 52.7% fewer high-horsepower tractors for sale now versus three years ago.” If you look at tractors that are less than five years old, the situation becomes even more dire. “Compared to three years ago there are 79.3% fewer tractors for sale today.”

Of course, this translates into increased competition for what is available. “When a nice tractor shows up for sale at an auction, they are bringing rising prices,” notes Peterson. “And this is going to be with us for a while.” Once the used inventory is diminished, it will take time to refresh the supply of used units. This mirrors what is occurring in the automotive market, if you can find a new unit the pricing can be more attractive than used.

Manufacturers Adjust to Market Realities
Compounding the farm equipment/parts shortages is that while other industries were sidelined during the pandemic, agriculture production continued unfazed.

“Our business on the hay and forage equipment side never stopped,” says Julian from Vermeer. “A normal person in the field would think that everyone would stop buying equipment to see what was going to happen. But as far as the demand side, it never stopped for us.”

This high demand came at a time when the supply chain was becoming intermittent – starting, stopping and slowing down. Component disruptions are causing delivery delays that can measure in weeks or more as manufacturers wait on key parts. “It has been one or two parts that does not allow us to complete a machine,” notes Julian. “We have been able to supply generally, by season. That is our goal. When we take dealer orders in the late summer, then we do everything we can to get those orders fulfilled before the season gets there.”

There is juggling that is going on at some manufacturing facilities in terms of product mix. “We have had to do a lot of toggling back and forth,” notes Julian. “That is not normal manufacturing. We make those decisions based on what we have the parts to actually build. Then if we have to make a decision between one line or the other line, we have a lot of data that we can consult like previous year’s retail volume. Our dealer field inventory metrics also show us how well we are positioned with equipment on dealer lots.”

Parts are not the only shortage faced by manufacturers. “There is a labor component to this as well,” says Julian. “It is just as difficult to get people to work as it is to get components. That is also affecting a lot of the parts availability, the transportation.”

Shortages to Continue
The outlook for availability could remain challenging. “I think it is going to be a little more ‘bare shelf’ than what you saw last year,” notes Julian.

Dealers now must plan and order equipment/parts months, even up to a year, in advance.

“With a lot of our suppliers, whether it be gearboxes or drivelines, the lead times have almost doubled,” says Julian. “You used to have a six-month lead time on a gearbox. Today it is a year.” Parts availability and lead times determine what you can build. “That is why you are starting to hear people say I can take no more orders, the next time you are going to get something from us is 2023.”

Cost is another consideration. “If you are relying on things that are built overseas, which just about every one of us are to some degree, the freight cost has tripled. That is where some of this pricing increase has come from. Then steel prices have tripled in the last year. But steel is a commodity and prices have started to come down a little bit. It has certainly peaked.”

Tips for managing through the ag supply chain issues:

1. Be Proactive. What can the producer do ahead of time?
   Producers need to work with dealers on preventive maintenance and purchase spare parts they may need in advance. In turn, dealers need to do their best to promote these practices to their customers and ensure they have the appropriate parts inventory by ordering from their manufacturing partners in advance.
   
   Both producers and dealers need to work together to identify any long-term equipment needs and act accordingly. Plan for 12 months to acquire a new piece of equipment and prepare for tight inventory in the foreseeable future.
   
   
2. Consider a slightly less than “Just in Time” Approach
   In the future, dealers may want to take better advantage of manufacturer floor plans to carry inventory rather than relying so heavily on just-in-time equipment deliveries. Almost all manufacturers provide a floor plan, and usually with interest-free terms. Perhaps certain dealers got used to more of a just-in-time mentality. We're all used to that even in our personal lives. Maybe that was overdone.
   
   Carrying inventory for a limited time does not necessarily add cost. Many times, the manufacturers provide at least six months interest free. Stocking a reasonable amount of product on behalf of the manufacturer you represent makes sense and allows the dealer to meet local demand.
   
   
3. Build Relationships
   There are some lessons learned from the current situation. People can learn so that they're better prepared when this kind of situation may arise again. Dealer relationships with vendors have proven valuable in this environment. There's only so much you can do now to create the relationship if you don't already have it. A lot of vendors say they are providing equipment to the dealers that have supported them over the last five years. They're really looking at what the relationship has been and prioritizing those that historically have maybe supported the manufacturer when needed.
    
   At DLL, we believe dealers that have done the best have a really good ability to forecast and have a stronger relationship with their end-user customers. Some of the vendors we work with are very seasonal and we work with dealers who try and preapprove a customer months in advance, maybe a season in advance. Most of these dealers know their customers very well.
   
   This can serve as a template for other dealers. They can do a better job of identifying those customers and working with a finance company to preapprove those customers. Then the dealer can order for the customer with some degree of assurance.
   
   In summary, the personal relationships between end user and dealer and then dealer and manufacturer and dealer and finance company are essential. The most important of all these relationships is for the dealer to establish an understanding of their end user customers operations and corresponding equipment needs. With this knowledge, all others in the chain can adjust their plans in advance and source the equipment and the relevant financing with more certainty. While the immediate environment is volatile, the long-term trends remain positive and with the further refinement of business practices we will collectively succeed to implement our business plans.