Fortunately, we entered a period of great prosperity in agriculture so they could work off the inventory and manage their way out of the situation. But recently, many dealers I’ve visited with have mentioned their growing concern with increased levels of used inventory. In fact, this increase is making dealers and manufacturers quite nervous. Is the current situation akin to what Yogi Berra would say is, “Déjà vu all over again”?
Most dealers say no, it hasn’t reached panic level … yet. Why? First, demand for most products remains high. Second, commodity prices are holding up well in general. Outdoor power equipment is doing better and the large property and construction sectors are holding their own in most regions, except drought-stricken areas. Today’s high inventory problem mostly pertains to used combines. However, a downturn in commodity prices or some other shock to the demand side could see inventory problems escalate rapidly beyond just combines.
One way used combine inventory has been managed over the past several years is through export markets. Exports have increased and are a vital part of keeping used combine inventories at healthy levels. But, there may be a cloud on the horizon. Exports may become less vigorous due to Tier 4 engines. The problem being that not every country has the proper fuel for Tier 4 technology, thus potentially lessening demand.
Another factor keeping used equipment inventory at a somewhat manageable level is producers who use accelerated depreciation to roll their equipment to keep the cost down. With the expiration of Section 179 accelerated depreciation, there may be less incentive to roll. This is especially true if you examine the combine/harvest capacity-to-crop ratio, which is currently more than 3.5 to 1. This change could drive some producers to forego purchasing a new combine. Fewer new combine sales could also mean fewer trade-ins and less used inventory.
Manufacturers may find innovative ways to assist dealers in managing used inventory. They might offer fewer changes to new products, thus, creating less incentive for producers to upgrade as often. Or, they could offer fewer financing incentives on new models – reducing some demand for new equipment.
As an industry, we may want to consider how to reduce the practical life cycle of a combine. With the near elimination of mid-sized farmers and fewer potential purchasers for the used equipment of the large producers, there are fewer life cycle turns for new equipment. As I indicated earlier, export markets can only absorb so many units. Is the answer to scrap equipment sooner in the life cycle? Maybe you have a better long-term solution for inventory overload? If so, I would love to hear from you.
My main point is that the market for large tractors appears to be holding up for now. Let’s pray that trend continues. However, the overloaded used combine market is cause for concern. According to one source, the ratio of used-to-new combines has increased more than 10 percent in just the last year. Not a good sign. Many dealers have crunched their numbers and know they have too much cash tied up in used combine inventory. Some have turned to auctions, but nearly everyone agrees that is not the path to fame and prosperity … even if it can be a useful short-term tool.
The warning signs are there, but as I said earlier, most dealers don’t believe it is time to panic … yet. However, it is time to manage your used inventory before it reaches a critical stage. Your recent experiences and memories of past inventory problems can provide you with a better perspective today compared to a few short years ago when used equipment inventory levels became a major challenge.
Let’s learn from history and keep trade-in valuations realistic. Don’t take the deal if you don’t have a home for the trade and don’t allow your inventory to get out of hand. Use caution and avoid déjà vu all over again. And that’s the way I see it.
PAUL KINDINGER is president/CEO of the North American Equipment Dealers Association. The association provides educational, legal, legislative, and financial services to approximately 5,500 retail agricultural, construction, large property/rural lifestyle, and outdoor power equipment dealers in the United States and Canada.