The Space Between

I have a really good outlook for Used Equipment in 2019. It won’t be because of On-Farm Income or Record Commodity Prices. It will come from the age of equipment on the Farm. The age of equipment is the oldest is has been in the last 5 years. From 2009-2013 New Machinery was produced in record numbers. Every year was the “Best Year Ever” and used inventories reflected the sale of new. The market was flooded with 1-2 year old trades. This was caused by record On-Farm Income which cause the One-Year-Roll Cycle.  The same thing is happening today. The market has a good supply of 1-2 old machines and a good supply of 7 plus year old machines. The issue is the space between.

         I am a firm believer in the importance of not only understanding the washout cycle but where each segment and machine is at in the washout. This is the simplest and most effect way to measure projected days in inventory, Inventory Turn, and overall health of Used Equipment Inventories. One common theme I see with Used Equipment Inventories is the measurement of health is too often reflected in the total dollars divided by the number of locations and Used Equipment Turn. Please don’t read this and think I don’t deem these to measurement unimportant because I don’t. The only way for the wash out cycle to work is inventories have to have a steady supply of equipment throughout the portfolio.

         In order to have inventory turn be fluid, there can’t be holes in pricing or year segments. For example, if there are no 1-2 year old machines in inventory there won’t be any 3-7 year old machines either. Simply because there are no 1-2 year old machines for the 3-7 year old owner to trade for. In this situation, more than likely the older than 7 year old equipment has become stagnate and aged because, these owners are looking for 4-7 year old equipment trade there older equipment on.

         A trend is developing that could have the same impact. The 1-2 year old segment is showing a buildup of equipment. More New Equipment has been sold over the past two years than the previous three years. This is great but does come with some repercussions. The issue is the age of the equipment being traded in. What I see is more 5-7 plus year old equipment getting traded with high hours for its age. The lack of 3-5 year equipment with moderate hours will cause a problem in Dealer’s Used Equipment Inventories. The bigger issue is, where is the 3-5 year old equipment, with moderate hours, going to come from?

There weren’t enough of these models produced new to fill the void. The 2012-2014 model equipment will continue to be an issue not only in population size but number of hours as well. If this trend continues there could be a similar issue seen in 2009 – 2011. It won’t be cause by record On-Farm Income rather, not enough of the right used equipment in the supply chain. I am not saying there won’t be equipment to trade because that is not the case. I fear there will be a limited supply of equipment in the middle, 3-5 years old, to complete the washout effectively an timely.  

For more topics like this, listen to Moving Iron Podcast and read Moving Iron Blog. Moving Iron Podcast and be found on iTunes, Google Play, TuneIn Radio, Stitcher Radio, SoundCloud, and is part of the Global Ag Network. Also, checkout the Moving Iron Podcast YouTube Channel. Here you can Find Market Rundown with Chip Nellinger and Angie Setzer.  Hit me upon FaceBook, Twitter, and Instagram @MovingIronLLC or email at movingironpodcast@movingironpodcast.com. So until Next time, let’s go move some iron. This Casey Seymour, Out!

The Hangover

I wish I was writing about a wild weekend in Las Vegas, waking up with a Tiger in my room and having to explain to Mike Tyson how we got but I not. The Hangover I am referring to is not the hit moving rather the glut of 2012 – 2014 Used Equipment on the Market, more specifically Combines. 

         Everyone remembers the ride from 2010 – 2014. Equipment was flying off the Yard! Manufacturers couldn’t keep up with demand and buyers were flush with cash. Because the supply of new was so tight, Used Equipment was more valuable than in the previous years. Row Crop Tractor Hours did not seem to matter as long as there was one to buy. In many cases, retail prices were higher than when the tractor was new.

         The same was true for 4wd Tractors. During this time, options like PTO and 3pt started to become a “standard option.” More and more of these machines were ordered with options and more and more used buyers are seeking out these options. 4wd without at least a PTO has reached a point of obsolescence. Because of cost and efficiency, machines with PTO can do many jobs on the Farm.

         During this time Used Combines were not like the rest of the Used Equipment Market.  Because of on-farm-income, combines where being updated rapidly. The Normal flow from one series to the next was not happening. For example, a customer with a 50 Series combine might skip buying a Used 60 Series and jump right to a 70 Series. In some cases, which weren’t all that isolated, the same 50 series owner might jump to an S-Series. Jumping two series in the buying cycle. This played havoc on the Combine Market, not because of lack of buying interest, because for a few dollars more, why buy a one-or-two-year-old machine when you could buy a new one. The number of new units produced hit all-time highs and in subsequent years; so did the number of Used Combines. 

         In my opinion, Used Combines are an issue again. A few months ago, I wrote a column titled “The Space Between.” The point of the article is because of the number of Used Combines with 1000 – 2000 Separator hours it will become hard to complete the washout cycle because of the lack of 750 and fewer hour machines. 

         Why is this important? as the number of combines with 1000 or more Separator Hours continues to grow, there will be a bubble that will pop. Market Conditions have limited the number of buyers with machines in this hour range to upgrade. Most are electing to repair what they have instead of trading. In these segments, machines are getting more hours per year, on average, than they have in the past causing the hours to increase.

          Looking at the graph, the number of units from 751-1000 Separator Hours to 1001-1500 Separator Hours almost double in numbers. The same can be said for 1501-2000 Separator Hours to 2000+ Separator Hour machines. The combine number of units with hours ranging from 1000-2000 Separator Hours are about equal to the number of machine with 2000+ Separator hours. These Combines, for the most part, are 2012-2014 Model Year.

         With the exception of Combines with 751-1000 Separator Hours, all hour ranges have a month over month increase in units. Combines with 750 or less Separator hours will command a premium simply due to supply and demand.  I am anticipating a sharp devaluation of 2012 – 2014 Model Year Combines. I say this for two reason, the supply of units on the market and lack of buying interest. When the economy starts to pick up and on-farm-income increases, 2012 -2014 Combines, with more than 1000 separator hours, will have less buying interest than they do now and will be passed over. This will be the same as what happened from 2010-2012 with one and two year old combines.          For more topics like this, listen to Moving Iron Podcast, now part of the Global Ag Network, on iTunes, Google Play, Stitcher Radio, TuneIn Radio, and SoundCloud.  To continue this conversation go to  Facebook, Twitter, and Instagram @MovingIronLLC or send an email at MovingIronPodcast@MovingIronPodcast.com. Also, subscribe to Moving Iron Podcast’s YouTube Channel for the video version of the Podcast. So until next time, thank you for reading and let’s go move some iron! 

The Good, the Bad, and the Ugly.

A lot is going on in Agriculture right now! There is a very wet corn belt that could lead to some planting delays and, by the way, a lot of snow melt to add to the already swollen lake, rivers, and streams. If that is not enough, two epic Blizzards in 30 days, a massive Polar Vortex, and one of the coldest winters on record haven’t done any favors for the Livestock Producers this year. Last but not least, what would an article be in this day and age with talking about China and trade wars. With all of these factors in play, what does it mean to the equipment Industry?

In 2013 and 2014, I was having a conversation with other dealers across the US about the downturn we were heading into and what they were going to different. The interview usually ended with how long do you think this one will last? For the most part, we all thought 2019 – 2021 we would see the equipment market stabilize and begin the long, arduous journey back up. I think we can all agree that the equipment market has maintained values for the 18 months and definite signs of good Used Euipment Demand. The last big hurdle is On-Farm-Income. It’s still a struggle for Producers to make a profit and every efficiency and input matters. I have believed for the past 2-3 years 2019 would be the turning point for the Ag Market, and I think we are starting to see just that.

I see three factors giving the US Market the boost needed to get it over the hump. First, a trade deal with China will put certainty back into the market. An agreement with China will insert confidence into markets. More than likely, the agreement with China will have billions of dollars of US Ag Products involved that will increase the value of US Commodities for the year to come. I am confident this will happen in June or July of 2019. The biggest reason is the political ramifications the Trump Administrations and Republicans will face heading into 2020 if this doesn’t happen.

Secondly, the African Swine Fever (ASF) is a double edge sword. On the positive side, China has openly discussed 40% of the Hog Herd has been decimated by AFS. If China were able to buy every pig on the export market, they could replace less than half of their herd. On the flip side of ASF, the bulk of soybeans China buys every year go directly to feed hogs. That being said, China will need at least 40% fewer soybeans than in years past. I am interested to see how this play out in the Markets.

Fewer hogs will open doors to other sources of protein. US Beef has not had a long history of support in China, but year-to-date beef exports to China are up almost four times compared to this time last year. With rising cattle prices this will also have a significant effect on the Dairy Market. As Dairy Producers actively reduce their herds, raising cattle price will send more Dairy Cows to Slaughter for profit. Decreasing Dairy Herds will bring the cost of Class III Milk up and put more Dairy Producers in the black.

Lastly, the weather is going to affect planted acres. I have read 700,000 – 1,000,000 acres will go to prevent plant and upward of 7,000,000 acres of corn could be switched to something else, most likely soybeans. With OPEC stating they want Crude Oil at $70+ per barrel and EPA expected to sign off on a mandatory year around E-15 fuel mandate, ethanol will have increased demand and help support an increase in the price of Corn.  

So what does all of this mean? 2019 will be the year we look back and say “This was the year things turned for the better.” From what I have read and listened to, there could be $4.50 – $4.75 Corn by September or October. If this happens, producers will buy equipment. Used Equipment Values will increase because, like 2010, new production will lag due to ramp up and 2020 New Early Orders will spike leaving late model; low hour Used Equipment as the only choice to fill the void. I have a very positive and bullish look toward the end of the 2019 and beginning in 2020.

For more topics like this, listen to Moving Iron Podcast on iTunes, Google Play, Stitcher Radio, TuneIn Radio, SoundCloud, Spotify, and the Global Ag Network.  To continue this conversation go to  Facebook, Twitter, and Instagram @MovingIronLLC or send an email at MovingIronPodcast@MovingIronPodcast.com. So until next time, let’s go move some iron! 

The Easy Button

I have been working with Used Equipment for 12 years. During that time I considered many different ways to value equipment. I have looked at building calculators based on Dealer Price and then assumed an average sale price. I have also used the same method to compare dealer price to advertised retail price, cash selling price, and auction value to paint a picture of machine values. The one thing I have never done is put a blanket percentage of depreciation on equipment. If you are looking for an easy button, stop! It doesn’t exist!

    Like many of you, I get phone calls and talk with Lenders, Insurance Adjusters, and Appraisal Personal asking about equipment values. The question always comes up about “What are the standard deprecations year-over-year on equipment?” My answer is the same every time. What are commodity prices going to be, What is the weather going to be like, and what are exports going to do in the coming year(s). To say there is a standard across the whole market is an unrealistic expectation. For this to be true, all markets would be the same and have the same issues and hurdles to overcome.  On top of the overarching problems, each segment of the US has a different set of problems to overcome.

    For example, the trade area I work in has very few soybeans. To say the China Trade Issue hasn’t affected our trade area would be false but, the impact is less than felt in areas like Iowa, Illinois, and Indiana were soybeans constitute a significant part of the economy. Areas that have more cattle production are likely still struggling in this economy but are again move equipment in spite of the current economic conditions.

    One of the biggest mistakes I have made as a Remarketing Manager was trying to develop a calculator to find equipment values. I was trying to find an easy button! The issue wasn’t the data or the modeling. It was trying to rapidly adjust for changes in the market fast enough to stay ahead of a declining market. What I found was updating data every month wasn’t soon enough to keep ahead of the curve. That data needed to be more real time. What I found was combining past data with most current data was the only way to make a reasonable prediction of future equipment values. 

    With most of the Used Equipment being valued well in advance of delivering the New, knowing the past can be as valuable as present values. In my opinion, this is the best way to predict the future. Using Dealer Pricing removes the emotions attached to specs. What are duals worth? What’s PRWD worth compared to 2wd? If the Advertised Pricing, Cash Selling Price, and Auction Selling Price modeled as a percentage of the original Dealer Selling Price you can see what the year-over-year value of specs genuinely are and what hour ranges have the most significant effect.

    Unfortunately, this is a far cry from an easy button! This data has to be updated every month to make sure the outcomes are the most accurate. Auctions have to research, Continually mining Internet Retail Listing Sites, and Business Systems have to drill down to makes sure that only the actual selling price is used. No loaders, no GPS Systems, and no service or parts included in the selling price. Once established, you have useful data that will show trendline as they pertain to Model, Spec Options, Hour Ranges, and Machine Age.

    Now that you have trendline data established, the fun begins! Does what does past year-over-year data show and do the years in question have the same influencers as the current year? How do you use data from a tremendous upswing in the marker going into a 180-degree downturn? 2013 was a hard lesson for me. In 2013 I had three years’ worth of trendline data. I had several conversations about what was coming in 2014 and beyond. All the data I had was, for the most part, worthless. I had to come up with a new system, in a new market, with entirely different buying habits. I have learned more between 2013 and today than I ever learned in the years previous.

    Every piece of equipment has a different rate of depreciation based on market influencers, the health of each machine segment, as well as each commodity segment. Simply put, primary supply and demand economics. If anyone claims a blanket depreciation across all equipment segments to be equal, they are wrong! There is nothing natural about valuing equipment. Listen to the story the data is telling, and it will always work out.

         For more topics like this, listen to Moving Iron Podcast on iTunes, Google Play, Stitcher Radio, TuneIn Radio, and SoundCloud.  To continue this conversation go to  Facebook, Twitter, and Instagram @MovingIronLLC or send an email at MovingIronPodcast@MovingIronPodcast.com. So until next time, thank you for reading and let’s go move some iron! 

Reference Points

Earlier this year I wrote an article titled “There’s No Easy Button for Used Equipment Valuations.” The column outlined how paying attention to the markets and understanding history is a more foolproof method of evaluation equipment. In this article, I want to explain some of the reference points I use to see the health of the overall market as well as my current used inventory.

What is on the internet? TractorHouse.com and MachineryPete.com lists the numbers of machines in each category and by the manufacturer. I have this data back to August 2014. The categories included are combines, combine platform heads, combine row-crop heads, 175+ horsepower tractors, 100 – 174 horsepower tractors, sprayers, self-propelled forage harvesters and planters. These are the number of machines listed on various internet listing sites, respectively. I uses MachineryPete.com and TractorHouse.com because they have the largest number of machines. Mind you, there is much overlap between the sites and allows for a better market feel.

So for example, In April 2019 the used combine market was comprised of the 12,485 used combines. Of the manufactures I track, this is the breakout. John Deere 6931,  Case IH 3053, Massey Ferguson 266, Gleaner 533 and Challenger 29. I have recently added Lexion/Claas to the mix. I also track specific models for each category. Since I work for a John Deere dealer and the overwhelming amount of used equipment traded is John Deere, the particular models I track are all John Deere models. Continuing with the combine, these were the numbers for April 2019: S660-454, S670-1201, S680-1343, and S690-398. I have recently added S700 Series combines to this list.

So now I have all this data, what do I do with it? Like anything, the data gathered is only good if used. I use this bulk data to see what inventories are doing month-over-month and year-over-year. These data points help paint a picture of what the market is going to do. I look back at the same month a year ago and see if inventories were higher or lower than the current month. I do the same for the three months leading up to the current month to see if any trends are developing and compare back to a year ago.

To me, the past year is the most important, but going 3 and 4 years back is a great trend indicator. I take the data and make a graph for each month — not only of bulk data but also the hour breakouts for each manufacturer.

Data points me in the right direction. It doesn’t give me trade values or what a machine is worth in the future. It merely gives me a reference point in time and market supply. I still have to determine market demand of not only my local market but, the market as a whole. The internet has made the world a tiny place and transportation cost, as a percent of the sale price, has made buying equipment even more of a commodity. It is paramount that used equipment managers understand what is on the internet —  not just value, but supply. The better-understood market influencers are the more profitable used equipment becomes. Those who do not know their history are doomed to repeat it.

For more topics like this, listen to Moving Iron Podcast on iTunes, Google Play, Stitcher Radio, TuneIn Radio, Spotify, and SoundCloud.  To continue this conversation, go to  Facebook, Twitter, and Instagram @MovingIronLLC or send an email at MovingIronPodcast@MovingIronPodcast.com. So until next time, thank you for reading and let’s go move some iron!

References: TractorHouse.com and MachineryPete.com

Agricultural Tariffs and the Used Equipment Market

The Ag Economy is fragile at best! Interest is creeping up, commodities prices are soft, and the ability to make profit is a struggle day-in-day-out. This is not something new. Producers across North America have faced a decline economy since 2013. Each has been harder than the year before. Now it is spring of 2018 and there is no relief in sight.  Farm Income is predicted to be 7% less than last year and most weather models predict drought for most of farm country. 2018 will truly be a test for Farmers and Ranchers across all of North America. The threat of US Ag tariffs will not help anything.

On my podcast, Moving Iron Podcast, I have talked about how the Used Equipment Marketplace is stabilizing and is forming a soft bottom. Auction Values are growing stronger and are some of the strongest I have seen in a long time. The low hour, good condition stuff has been selling and is in high demand. I have said on my podcast, the surge of Used Equipment buying, in my opinion, is because Producers are buying more because they have to; not because they want to. In most cases, equipment has more hours then Producers feel comfortable with or the machine has high recondition costs to be field ready for the 2018 Planting or Harvest Season. These buying decisions are dictated by effects on cash flow. If the move increases cash flow, limits risks, and increases efficiencies then there is not much to think about. On the flip side, good luck!

The reason there is not a hard bottom is because the current state of the Ag Economy. One slip could send the market into a spiral similar to 2014. The Used Equipment Marketplace has been cut to the bone. Anything more would be the severing of limbs. If the current Ag Product tariffs are implemented I see three outcomes.

  1. Already strapped Producers will fail. I have ready estimates of and additional 10% increase in Farm Failures for 2018 and 10% more in 2019. If 20% of the Equipment buying population is removed the effect on the Used Equipment Market could take a decade to recover from.
  2. Like 2014 – 2015, buyers will be buying at auction driving retail values downs and repricing the market. Dealers will be forced to make balance sheet decisions with the New and Used Equipment on hand. This will increase the ramp up of dealership consolidation and coincide the Farm consolidation. This will put more equipment on the open market and with an already low supply of low hour, good condition equipment the market reaction will be all time lows for Used Equipment. I think this could result in a 15%-20% slide in Used Equipment Values in the first 18 months of the Tariffs being implemented.
  3. Dealership failures will be certain. Like in point 2, this will fuel dealership consolidation. Not all dealers will be on the sunny side of M&A activity. Some large dealer groups will fail! Cash will be King and dealers who have their proverbial house in order will have opportunities to grow. This shake up in the market will send more Used Equipment to the open market destabilizing Equipment Values further.

Right now, the Market is showing some strong signs of rebound. Each day values get a bit stronger and customers are buying equipment. If the market is left to deal with less On  Farm Income and raising Interest Rates, the market is proving it can deal with these negatives. If even lower On Farm Income, greater market uncertainty, and rising interest rates are in store, the market will not be able to handle these extreme negatives.

If you would like to continue this conversation hit me up on Facebook, Twitter, or Instagram @MovingIronLLC ,send me an email at MovingIronPodcast@MovingIronPodcast.com or visit www.MovingIronLLC.com .You can Also listen to MovingIron Podcast on iTunes, Google Play, Stitcher Radio, Tune In Radio, and Sound Cloud. Also catch “Moving Iron Podcast: Morning Market Roundup with Chip Nelliger” weekdays at 7:15 CST and “Moving Iron Podcast: Tax Moves with Glen Birnbaum” every week. So until Next time, Let’s Go Move Some Iron!!