Minding Ag's Business

Leasing Helps Cure Machinery Dealer Blues

By Marcia Zarley Taylor , DTN Executive Editor

Progressive farm machinery dealers are working off the glut of used equipment that has depressed the market the past two years. They're motivated by the memories of the 1990s when a similar surplus kept combines on some lots for four years (see related story by Machinery Editor Jim Patrico at http://online.dtn.com/…)

There's no easy way out when new sales stall and used demand falters. In the past some dealers exported excess inventory overseas, but today's strong dollar prices them out of the world market, including Canada. Also, other countries lack the fuel for new Tier 4 engines designed for the U.S. market. Manufacturers don't want to lower prices on new equipment, for fear of pressuring used prices further. They have stepped up certified, pre-owned programs to grease used sales.

Meanwhile, a glut of equipment continues to overhang the used market. TractorHouse.com listed 9,793 John Deere tractors greater than 175 HP this month, down about 10% in the last six months. But online sales and auctions are only part of the picture: a net 37% of dealers from all brands reported used equipment inventory as too high in November, according to a recent survey by Farm Equipment Magazine. Meanwhile, prices for used tractors slipped 8% in November, while combines fell 14%, the dealers estimated.

For the past two years bank executives surveyed by Creighton University's Midwest Goss Report saw machinery sales eroding: On a 100-point index scale, they pegged year-end machinery sales at 7, down from 29.5 last year.

"That's almost to the point of ridiculousness," economist Ernie Goss told DTN. "I can't say it will bankrupt them, but the direction is definitely going the wrong way." However, Goss doesn't measure leases which account for 30% to 40% of the business at some dealerships now, so the index may be undercounting actual farm machinery transactions.

Leasing helped some proactive equipment dealers dig out early. Midwest Machinery Co., a 13-store dealership in central and north central Minnesota, saw its ratio of used sales to inventory fall 40% since its peak in the summer of 2014, said Corey Weber, an owner and sales manager. That ratio now runs about 20% below year-ago levels.

"A year ago it felt like there was more uncertainty in the industry--more used equipment on the market and uncertainty about demand. We feel like we have a lot better understanding of the used equipment in the market and can match that to the used demand in our customer base," said Weber.

The newfound popularity in leasing accounts for much of the shift, Weber said. Growers gravitate to leasing when margins are tight because the practice frees up working capital and eases cash flow. Operators like the option to purchase at the end of the lease based on a fixed price since it can give them ability to capture equity (historically, purchase prices have been cheaper than the value of the machine at the end of the lease). Dealers like leasing since manufacturers own the equipment, somewhat insulating them from excess inventory.

Used equipment inventories at Wade Inc. in Indianola, Miss., also have dropped dramatically in the last year thanks to the shift to leasing, said General Manager James Braxton. The dealership has 12 locations throughout the Delta.

In the past, farm customers like Jeremy Jack of Belzoni, Miss., purchased equipment and traded annually. Now Jack is using a two-year lease, meaning he will trade a two-year-old tractor with no more than 1,500 hours rather than two tractors with 750 hours. That cuts trades in half and means Wade Inc. will need to find fewer second buyers for the used equipment.

Dealers aren't necessarily in agreement that the worst is over. Some worry that a wave of equipment will return once lease terms expire. Others say buyouts are so attractively priced, farmers will want to own at the end of their lease.

"We don't anticipate commodity prices will spike in the short term [back to 2010-2012 levels]. But we believe the market is starting to normalize now and used values are starting to stabilize," said Weber.

Meanwhile, for anyone with a 10-15 year-old machine, this is the best time to trade into a late model and get all the features and benefits of new technology, Weber said. Interest rates remain at historic lows and can be locked into financing or lease agreements. Like any cycle, though, good deals don't last forever.

Follow Marcia Taylor on Twitter@MarciaZTaylor

Follow Marcia Taylor on Twitter@MarciaZTaylor

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Dakota Ag 2/6/2016 | 12:56 PM CST
Now Jack is using a two-year lease, meaning he will trade a two-year-old tractor with no more than 1,500 hours rather than two tractors with 750 hours. That cuts trades in half??????

What?

When he was buying he bought two, but now that he is leasing he only needs one?

Not really,

He only trades one either way, it's just two years old now instead one year old as he would have done in the past by trading every year.