Manufacturing Industry

If The Farm Economy Stinks, Why Are Tractor Sales Higher?

Diesel Progress North American Edition, Oct, 2000 by Charles R. Yengst

During the past two years, a lot of nasty things have been happening in the farm equipment business and how you view the situation depends which side of the fence you live on. If you're the farmer, you probably could care less about the market, but wish that commodity prices would improve. If you're on the OEM side, the view is not too good because the farmer is not making money and isn't buying tractors unless the right deal is available. Then comes the guy in the middle, the dealer. He's looking at a tough sell these days and profits have to be suffering because of price competition.

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But there is a lot more going on here than meets the eye. You have to be careful about discussing the market for tractors and acknowledge the fact that a lot of tractors never get sold to farmers and are used in a multitude of applications beyond the farm.

Which leads me to this thought for the day -- namely that tractor sales are better again this year even though the farm economy is weak. Admittedly, farm tractor sales are looking better today than they did a year ago, but not significantly better and we may have to wait until later next year before farm tractor sales show any real improvement.

Last year, I noted how the OEMs were using the slowdown to really put the brakes on manufacturing with the aim of dropping tractor inventories in the field. That strategy was great for the manufacturers because it did reduce farm tractor inventories nicely from the peak levels seen two years ago. However, the maneuver was deadly for the component suppliers and other vendors supplying the OEMs, which all took a beating while waiting for the tractor manufacturers to get back to business.

In many respects, farm tractor inventories were too high in 1999 -- they had been growing for a number of years -- and they had to be reduced based on tractor sales, particularly in the high horsepower machines (tractors rated 100 hp and over). It was a bubble that had to burst. However, the OEMs were not too helpful in announcing their intentions and never made it particularly clear why they were doing what they did -- cut production levels 50 to 60 percent for the year while sales were off by about 30 percent (in big tractors only). The idea was to reduce inventories, plain and simple, and it worked.

Today, big tractor inventories are running about three months at current sales rates, yet unit inventories of new machines are actually 60 percent below the peak levels hit in the third and fourth quarters of 1998. At that time, tractor inventories for all machines rated 100 hp and over topped 15,000 units. At this writing, it's about 6000 units.

Going back to tractor sales this year versus last year, we are seeing little or no decline in sales of the big tractors on a comparative basis right now. In 1999, sales of 100 hp and over two-wheel drive/mechanical front-wheel drive (MFWD) machines for the U.S. and Canada were 18,885 units, while sales of pure four-wheel drive machines (rated over 160 hp for the most part) totaled 3776 units. We look for sales this year to be about even in both categories for North America, perhaps slightly better in the U.S. and a little lower in Canada. Regardless, the big downturn that occurred in 1999 is over and the trend is flat for the time being.

For two-wheel drive/MFWD tractors rated 40 to 99 hp, sales are going to be higher in 2000 versus 1999. We look for sales this year to be about 3 to 4 percent higher at a level of about 55,000 units compared to about 53,600 in 1999. That's not much of a change, but it is positive. I should note that inventories of these 40 to 99 hp machines is still considered high, as the industry has not done much to reduce field inventories. There are currently about 27,000 new units in the field, which accounts for about six months of sales.

The small tractor market, machines rated under 40 hp, is alive and flourishing. In 1999, small tractors accounted for over half of the market of all tractors. The farm tractor designation is a misnomer however, as a large portion of these machines are sold for multiple purposes other than farming.

Small tractors have had excellent sales growth during the '90s, rising from about 40,500 units in 1993 to nearly 77,600 units in 1999, up nearly 92 percent. Since 1997, sales have grown almost 40 percent alone, which is unprecedented in the tractor world.

Demand has ballooned because of the big increase in sales to rental companies and to many other customers outside of the farm community -- customers that look and act more like the average consumer. This year's sales of small tractors, for example, are 15 percent ahead of last year through July, and year-end results are expected to be up by about 12 to 13 percent, with sales in the range of 88,000 to 90,000 units. These estimates are based on Equipment Manufacturer Institute reported retail farm tractor sales, with nonreporting companies factored in.

The small tractor market is heavily governed by end markets outside of farming and will continue to be demand-driven by these nonfarm activities, probably for a long time. Looking at the next few years, I would put sales of small tractors between 90,000 and 95,000 units in 2001, up just slightly from the current year estimate. We may see some saturation in the market in the next few years, but demand will likely continue to grow, albeit less robustly.

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Manufacturing Industry

If The Farm Economy Stinks, Why Are Tractor Sales Higher?

Diesel Progress North American Edition, Oct, 2000 by Charles R. Yengst

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