Ask the Expert: How the Ag Economy is Impacting the Used Equipment Market



As I am writing, soybeans have hit 2013 pricing, corn and wheat are over $7, and there are drought conditions for the summer. Second crop corn in Brazil is under pressure from heat and drought during pollination, threatening bushels. World demand is still high, and world stocks are low. Everything the world needs has some manufacturing, freight or raw material shortage, increasing costs and moving delivery dates further and further out. Add these ingredients together and you have a perfect storm for much higher commodity prices.

As the ag equipment industry trudges toward a 2012 like economy, I find myself asking, “Did we learn anything from the last go-around?”

There’s no doubt the next few years will be full of machinery upgrades. New equipment sales have picked up, opening the door to more available late-model-low hour inventory. More new equipment is on order than in previous years. Any new stock on the lot has long been sold, and if any new equipment shows up, it is retail sold from the factory.

Used equipment sales have also done an about-face and breathed new life back into the saturated 2012-2014 model markets. The late-model-low-hour market, a small brush fire in late 2020, is now a full-on pasture fire burning red hot! Since Jan. 1, just over 700 combines were removed from retail listing websites through April 1. Of the 700-plus combines removed, 600-plus units were removed between March 1 and April 1. I am making some assumptions but, to me, this means 600-plus used combines we sold without a trade! The heavy lifting was done in March, and trend lines show there is not much to slow it down. This is the most impactful news since 2014. Sales are ramping up, machinery is moving and lots are emptying, making plenty of room to reload the used equipment washout cycle.

The ag equipment industry’s ecosystem is dependent on the constant influx of new equipment. The used equipment generated secures an annuity of future parts and service business. The bigger the annuity, the bigger the absorption rate and the better a dealership survives economic downturns. I have been to several countries where the flow of equipment is constant. Only the extreme ends of the spectrum exist, very old machinery or very new machinery. Consequently, the parts room for these dealerships is a third of the size of the parts rooms we see in North American dealerships. These dealerships depend heavily on new equipment sales and, in many cases, have none or very little when it comes to used equipment to sell.

For the ag equipment industry ecosystem to operate, there must be a balanced washout cycle. Each new machine sold will require a minimum of 5-6 used machines to wash out. Typically, whether new or used, each move through the washout will generate a trade until “Cash No Trade” is achieved. Each movement through the washout has a very distinct purpose. Interrupt any of these steps and inventory issues will arise. 

A disruption at the front, middle or end of the washout cycle has the same impact on inventory. In 2008-12 the interruption in the washout cycle was at the front. The first and second trade buyer transitioned to new, and the number of late model and low hour machines piled up on dealers’ lots. By having this shift in buying habits, the third and fourth trade buyers were now counted on to buy the late-model-low-hour equipment. For several reasons, these buyers aren’t capable of buying these machines.

During this period there was a “Leap Frog” effect happening. For example, a customer had a 50 series combine and traded it for a new 70 series combine. Typically, the 50 series customer would trade for a 60 series combine, and the 60 series combine would trade for the new or used 70 series combine. Leap frogging is a disruption and causes an issue in the middle of the washout cycle. 

In a regular trade cycle, this customer is looking to purchase the 5-7-year-old combine, which is in the middle of the washout cycle. If this buyer isn’t available, the front end of the washout cycle turns quickly and regularly but, the middle and the end are a clog in the funnel that is hard to remove.

The end of the washout cycle is an animal all its own. The buyers at the end of the washout cycle don’t have a defined buying cycle. They tend to buy out of necessity than the need to upgrade. They also tend to keep a piece longer and might run the machine for 20 years. What makes the end of the washout cycle work well is that just about every buyer participates in purchasing the 5th and 6th trade, thus making the number of potential buyers endless.

Every step of the washout cycle matters. Anytime one of these steps is disrupted, the ripple effect magnifies each subsequent step before or after. If the sale of new equipment outpaces the ability to sell used equipment, 2014-16 will repeat itself. On the other hand, if new equipment sales decreases or slows, gaps in the washout cycle create voids, not allowing movement through the washout cycle funnel. The more metered the ag equipment industry is through this next upcycle, the better it will be through the next down cycle.



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