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Oct. 10, 2014 Association of Equipment Manufacturers (AEM) reports:
Net cash income is also set to decline, though slightly less than net farm income as it includes $10 billion in carryover stocks from the previous year. The decline in income is mostly due to a drop in commodity prices. Crop receipts are expected to decrease more than 7% in 2014, led by a projected $12.8-billion decline in corn receipts and a $6-billion decline in soybean receipts. Livestock receipts, on the other hand, are expected to increase 15% in 2014. When we look at farm business income we can get a better sense where farm income is expected to increase and decrease. Farm businesses are defined as operations with gross cash farm income of over $350,000 (labeled "commercial") or smaller operations where farming is reported as the operator's primary occupation (labeled "intermediate"). Approximately 9% of U.S. farms are commercial and 34% are intermediate. The biggest decreases in net farm income can be found in the Northern Great Plains (-14.8%), the heartland (-16.4%), and the Mississippi portal (-27.5%), i.e., in the Midwest and the South.
Of course, farm financial risk indicators such as the debt-to-asset ratio are expected to continue at historically low levels, indicating continued financial health for the sector. Though, while the farm economy might still remain strong, the farm machinery industry has been more strongly impacted by the downturn. Per the Ag Flash reports and commentary of various members, demand for farm equipment, especially larger pieces, has been declining in recent months. Year to date July 2014, Total Farm Machinery Shipments (until July) declined 12.5% compared to the same period the previous year. Also, from the USDA data we can see that the value of machinery and motor vehicles is expected to fall by 2.4% in 2014. This decrease is mainly due to a decrease in gross capital expenditures. Of course, while machinery shipments or gross capital farm expenditures on machinery are decreasing, they are coming off historical heights as farmers updated their equipment in this favorable climate. This strong cycle was realized through a combination of high commodity prices due to shifts in supply and demand, a drought that spiked prices and an increasing ethanol usage, as well as strong government stimulus through subsidies and tax-incentives. Naturally, to understand the gravity of the current situation, it is important to take a brief look at some of the factors causing the downturn. While lower farm incomes have certainly been a driver, there is more to the current downturn than just low commodity prices. First of all, capital expenditures on machinery are expected to decrease from past heights due to a change in tax incentives and subsidies. The amount that can currently be deducted for tax purposes is set to drop from $75,000 to $25,000 and the past IRS sec. 179 or first-year bonus depreciation has expired. Under this bonus depreciation, farmers could minimize taxes through additional machinery purchases, which is coincidentally also causing a surge in the used equipment market today. Additionally, subsidies are changing as the new US Farm Bill is replacing the fixed subsidies with a new stronger insurance scheme. Secondly, farmland values are rising at a slow pace, limiting the farmer's ability to use this as collateral and thus reducing their capacity to get credit. According to the Kansas City Federal Reserve Agricultural Finance Databook, loan volumes for farm machinery and equipment continued to drop in Q2 2014, marking the 6th consecutive quarter of declines. This hinted at a further slowing in capital spending combined and perhaps a shift towards loans for short-term operating needs. Third, the used equipment market has become inflated as more farmers are offloading equipment they turned over during the strong cycle of past years. While some sources are indicating record prices for used equipment due to the low amount of hours logged, in general, higher inventory of used equipment is still driving down the price to below what the machine is worth. The large inventory of used equipment sitting on dealer lots is not only decreasing the ability of the dealers to purchase and finance new equipment, but is also lowering the value of the trade-ins farmers tend to use when buying new equipment. Dealers might go so far as to not accept used equipment for trade-ins. The fact that some large companies are offering sales incentives such as free warranties on used equipment illustrates the urgency to get it off the lots. Comparing the regions where the most machinery has been purchased per farm to where farm business income is decreasing the most, namely the Midwest and the south, the severity of the current market adjustment becomes even more obvious. Knowing that farmers replenished their stocks in the latest cycle and given the forecasts for farm income, the decline in subsidies and tax benefits, the forecasts for farm values, the underlying declines in commodity prices and the state of the used equipment market, we are looking at a multi-year adjustment from our current historical heights for sales of farm equipment in the U.S. Learn more on October 23 during the AEM Ag Services and State of the Market Update Webinar. Tweet |
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