U.S. Farm Equipment Forecast Through 2014

by: Yengsts Associates     URL: www.yengstsassociates.com

3/11/2010

According to Yengst Associates and as indicated in the table below, agricultural equipment had a downturn in 2009 after several years of growth in the tractor business. Harvesting combine demand continued to be stronger in 2009, while big tractor sales dropped off.

Furthermore, there has been a correction in sales of small, compact tractors. Sales of these machines have declined rapidly since 2007 when the housing market started to have troubles. Rental houses are not buying these machines in the quantities they once did, some of which is a combined factor of cash flow and the weak economy. Big tractor demand held up until 2008, then began to slow and then drop in 2009. As shown above tractor sales overall declined about 21 percent in 2009 versus 2008.

The compact tractors had much weaker sales and had a bigger impact on overall sales of these machines. Big tractor (100 hp and larger) sales were down about 15 percent for the year. Modest sales growth is expected this year (2010), although bigger improvement is expected by 2011 and through 2014. Furthermore, sales are expected to grow to about 230,000 units by 2014, which is where we were two years ago.

Combine sales remained strong through 2009, up about 15 percent over the previous year’s results. Combine sales are expected to drop in 2010 roughly 10 – 15 percent and then get turned around in 2011. Growth from 2011 through 2014 is not expected to be very strong, but positive.

Production of tractors and combines will follow demand closely. Tractor production was down about 23 percent in 2009. It will improve by 2014 to the levels seen in 2008.

U.S. Agricultural Economy

Once again 2008 was a record setting year for U.S. farmers, particularly for those who grew feed crops, oil seed and food grains. Increases were supported by volatile commodity prices and, on the average, were higher than historical norms. The US Department of Agriculture forecasts that all three segments of farm sector earnings will decline in 2009 and increase in 2010.

Farm cash receipts for crops and livestock are forecast to decline by 13 percent in 2009 to $282.1 billion. Prices for both crops and livestock animals and products continued to decline in 2009 forcing farmers to accept lower prices than they had anticipated at the time production plans were made. This was all in reaction to deteriorated global economic conditions and reduced demand for goods. Farm cash receipts for 2010 are expected to increase $5.5 billion, or two percent.

Conditions for the livestock sector are forecast to improve in 2010 as consumers are expected to
increase their consumption of animal products thus holding up prices and improving earnings of livestock producers. Crop receipts are expected to decline $6 billion however. Production expenses are forecast to be the same as in 2009 as are government payments.

Net farm income peaked at $87.1 billion in 2008, is forecast to fall to $57 billion in 2009 and increase in 2010 to $63 billion. The precipitous fall to $57 billion in 2009 was due to the evaporation of worldwide demand for U.S. agricultural products given the global recession. The increase in 2010 is predicated on the theory that the global recession is over and global demand will increase. Net cash income is forecast to drop to $69.8 billion in 2009, a 28 percent decline, and increase to $76.3, or two percent, in 2010. Despite the forecasted drop in 2009, it remains at a higher level in 2010 than the previous 10 year average. Direct government payments in 2009 are projected to increase to $12.5 billion, a two percent increase over the 2008 payment of $12.2 billion. Direct government payments in 2010 are forecast to be the same as in 2009.

The table below illustrates the trend of tractor unit sales in the U.S. and Canada. Total tractor unit sales started to decline in 2005 and have declined ever since. What isn‘t shown is that the real drop in unit sales took place in the compact and small tractor categories. In fact at this time demand for large tractors started to increase and reached record levels in 2007 and 2008 when farmers were flush with cash and took the opportunity to replace their existing equipment and also expand their fleets. Unit sales of these machines fell 11 percent in 2009 but were still at historically high levels. At the same time that US tractor unit sales were on the decline, unit sales in Canada were increasing. Canadian unit sales increased in all size categories through 2008, except for 100+ horsepower 2WD units in 2006, and then fell in all size categories in 2009. As indicated in the chart, Canadian sales were experiencing the opposite than the U.S.

It is important to look at tractor and combine unit sales when looking at the agricultural economy. As discussed above, the farm economy has been enjoying record income and receipts for most of the last five year. The table above, illustrates North American unit sales for the corresponding years.

Net cash income as depicted in the table above is a measure of solvency; the ability to pay bills, make payments on debt etc. The chart above also shows that there is a strong correlation between the number of “farm sized” tractors sold, machines with >100 horsepower, and U.S. net cash income from 2004 through 2009. The number of units sold is expected to fall again in 2010 in relation to net cash income due to the fact that credit is tight and these machines are very expensive. That and crop receipts are still falling due to reduced global demand and fewer livestock to feed because of livestock producers cutting their herds because of the high cost of feed the last two years.

It is interesting to look at the correlation of U.S. combine unit sales to net cash income. Combine sales have grown continuously since 2003, approximately 110 percent, while tractor sales declines. It appears that many farmers have taken their income and bought new combines. U.S. combine unit sales are expected to decline in 2010 and 2011 because of reduced demand due to tight credit and the fact that it may be a replacement market at this point. NA combine sales down single digits 10/11.