As the global recession of 2008 and 2009 took hold, a big question was raised regarding how agriculture (ag) would be affected. While construction and other equipment sectors are hard hit, agriculture has different economic drivers. Would the ag equipment market suffer the same calamity?

Agricultural equipment has seen some tremendous growth in recent years, with an average year-to-year unit sales growth rate of 8% from 1994 to 2004. From 2004 to 2008, sales declined by an average of 3% per year. Ag equipment sales were in a minor decline years before the recession began.

Sales of agricultural equipment have been hit, although not as hard as the sales of construction equipment. Year-to-date 2009, ag is down just under 20% in units sold from the comparable 2008 period. Some of the sales being currently reported resulted from orders placed in the second half of 2008.

Combines and larger tractors — four-wheel drive and two-wheel drive tractors larger than 100 horsepower — have seen higher sales in recent years. With high oil prices of recent times, and the increased use of corn ethanol as an alternative fuel, sales of these larger machines have increased in the last few years.

Small Equipment Drivers
Smaller tractors, particularly those under 40 horsepower, have economic drivers much more similar to other consumer goods. These tractors are purchased mainly for semi-recreational use — “hobby farming” — and less for commercial purposes. Their sales have declined more sharply since 2003 and have followed vehicle purchases. The Bureau of Labor Statistics, includes many items under the term “vehicle,” such as motorcycles, campers and jet skis.

Large Equipment Drivers
Commercial ag producers buy larger equipment. Their purchases are motivated by several factors, including farm income, debt-to-asset ratio and commodity prices.

The USDA forecasts a substantial decline in farm income along with an increase in debt-to-asset ratio for 2009. These two factors were both moving in favorable directions to record highs and lows, respectively, in 2007 to 2008.

Credit
Credit is less of a problem in agriculture than in other sectors, but it is still a problem. To find out how much of a problem it is, AEM recently conducted a survey of its members to learn the impact of credit issues. Specific to agriculture, responses ranked credit difficulties in the following order of importance; the score represents the average rank position (1-5) for each item:

The ag machinery market fared substantially better than construction equipment, as 10% of ag equipment OEMs reported they were unable to obtain enough credit to operate, while more than 30% for heavy construction equipment manufacturers.

Roughly 47% of agricultural equipment OEMs reported that their dealers are having trouble getting the credit necessary to buy inventory, and 68% said end-users were having trouble obtaining necessary credit. The OEMs estimate that 10% of sales have been lost from such credit difficulties.

Exports
Agricultural equipment exports have grown steadily from just over $5 billion in 2004 to just over $10 billion in 2008. Typically, ag machinery exports are strong in the first half of the year while the second half is weak. This year has been a little different; the first two quarters of 2009 have barely reached the export level of 2008.

The countries that have been the largest importers of American equipment in recent years are continuing to import in 2009, although the volume has mostly declined. Surprisingly, some countries that typically do not receive large volumes of exports have shown substantial growth in 2009. Despite this growth, they are not likely to reach the same levels as the larger importers.

In some countries, oil prices drive trade. Russia was a strong consumer of agricultural equipment until recently, and the drop in the price of oil from the Urals seems to correlate with the decrease in ag equipment imports.

The top eight recipients of U.S. agricultural equipment exports have all declined. Canada has fared the best, and has traditionally been the dominant partner.

New growth in 2009, in terms of dollars, has come from some unexpected places.

Australia’s growth ranks fairly high even though it is much less than previous years. The other countries are not known for high or consistent volume, but in terms of dollar growth in trade for 2009, they top the list.

Perception
As part of its service to members, AEM conducts quarterly surveys on various business concerns. While the results aren’t an objective measurement, they do serve as a reliable indicator. The indexes are created by taking the responses — rising, falling or staying the same — and applying a score of +1 for rising, 0 for staying the same and -1 for falling. So an above-zero index means the metric is rising, below-zero means falling.

Among other questions, AEM asks member companies whether the unit volume of demand for their products has gone up, down or stayed the same during the last quarter. We also ask them to give their outlook for the next 12 months. The chart above shows the responses for both questions. Interestingly, as unit volume of demand takes a small fall in Q2/09, the perceived outlook for the next 12 months is rising.

Perceived profit margins seem to have begun to drop before the recession hit, although the uptick in the most recent quarter is probably caused by changes made in response to falling demand. When considering capital spending, employment and wages, we note all began dropping quickly after demand fell. As companies make adjustments, it seems likely their profit margins will improve once demand stabilizes. It is interesting to note that capital spending dropped first, followed by employment, followed by wages.

Another factor in profitability is the relationship between prices charged for equipment and prices paid for input materials. If prices charged decline at a slower rate than prices paid, it should increase profitability, and that’s what seems to have happened in late 2008 and early 2009.

While agricultural equipment has had a smaller storm to weather than construction equipment, it’s clear that manufacturers face challenges. Members report that credit has been a serious obstacle, and smaller equipment suffers from consumer caution. Larger tractors and combines have benefited from both a strong interest in ethanol, and inescapable population growth. As the recession eases and economies improve, agricultural equipment manufacturing should follow suit.