While supply and demand imbalances continue to plague many ag machinery dealers, the three publicly held North American farm equipment dealership groups are reporting progress in reducing their equipment backlogs. On the other hand, it has come at a price as dealers report that ongoing low used equipment values offer little or no profit margin.

“The major driver of this current dip in used values lies mostly with the increasing number of machinery auctions featuring a lot more one or two used items that individual farmers have been selling to free up some cash,” says Greg Peterson (Machinery Pete) in his Machinery Pete’s Quarterly Used Values Index report for the third quarter 2016.

Diminishing Inventories

When it announced its third-quarter earnings on Nov. 8, Cervus Equipment Corp., John Deere’s largest dealership group in Western Canada, reported it was able to reduce its inventory by $62.7 million (18.6%) compared to Sept. 30, 2015. On that same day, Rocky Mountain Dealerships, Case IH’s largest Canadian dealer, also reported in it’s quarterly earnings on Nov. 8 and said it had reduced its inventory by $49.2 million, or 9.9%.

Fargo, N.D.-based Titan Machinery, the world’s largest farm equipment dealer group, said on Nov. 30, that it had reduced its used equipment inventory by $86 million, or 32%, through the first 9 months of its fiscal year ended Oct. 31.

In his analysis of Titan’s fiscal year 2017 third-quarter earnings, Mircea (Mig) Dobre, senior research analyst for RW Baird, said in a note: “Titan aggressively cleared out used inventory which drove sales but also pressured equipment margins … should improve as aged used inventory is finally cleared, while the highly profitable parts and service business can return to growth.”

Continuing Headwinds

At the same time, factors like lease returns and individual farmers selling their own equipment are coming into play, slowing dealers’ efforts to put a meaningful dent in the ongoing overhang of equipment on their lots.

But dealers are demonstrating they will utilize whatever resources available to reduce equipment inventories, including auctions. Responses from dealers to Ag Equipment Intelligence’s 2017 Dealer Business Outlook & Trends survey indicated that farm equipment retailers have increasingly used auctions to expedite sales of used machines. In 2016, 48% of dealers said they used auctions to reduce inventories. This is up from 43% in 2015 and 19% in 2014.

Peterson sees this trend continuing into 2017. “We will definitely be seeing more farm auctions pushed and driven by tightening restrictions by ag lenders from now through spring 2017. More farm operations will downsize. More older farmers will decide to retire. And I think we will continue to see more farmers selling that one or two extra pieces of used equipment to help free up some additional cash (to keep their ag lender happy) from now through spring 2017.”

Lease Returns

He also expects that lease returns will be a major headwind to dealers’ efforts to get used inventories down to manageable levels. Calling this “the monkey wrench” in the industry’s attempts to get rid of excessive backlogs, Peterson said, it makes it particularly difficult to get a handle on when used inventories return to profitable levels.

“The first wave of off-lease returns is now washing up on shore with John Deere Financial and CNH Credit. I do like how initially it appears as though the effort to move this excess is focused on the dealer network. It’s being pushed back through dealers and have them situationally make money selling this used equipment to their customers,” Peterson said, but added, “Not all dealers are able to play here.”

It’s an adjustment that was needed, he said, “to take the foot off the gas a bit.”

How and when it all folds out will be largely dependent upon the major equipment makers, according to Peterson. “Going forward, what will be the driving motivation for John Deere Financial and CNH Credit? Will it be to maximize return on selling off lease inventory? What timelines will they use — move it fast or hold it? It certainly bears watching as obviously the implications for the used market are huge.”