Glass Management Group has maintained data on U.S. tractor sales, by horsepower category, by month, since 1969 and this extensive data base has allowed the production of an annual Tractor and Combine Sales Forecast each November for the following calendar year, which has been published publicly since 1999.
As we reviewed our 2024 forecast versus the actual retail activity each month, we noted with the March AEM Flash Report that the retail activity in the Less than 40 HP and in the 40 – 100 HP tractor categories were significantly below our forecasted levels and that sent us back to determine why we had such a serious miss in our forecasting efforts.
As the year has unfolded, two of those categories have fallen below our forecasted totals for the year-to-date totals, even though the total numbers of tractors forecasted for both categories were down significantly from 2023 levels. The <40 HP category is now about -20.1% below our original year-to-date forecast from November, 2023 while the 40 – 100 HP category remains significantly below our forecast, by -19.6%.
This loss of sales in these very important segments of the market, which comprised 87.1% of all tractors sold in 2023, is being felt by all of the U.S. tractor manufacturers since it impacted the heart of their tractor lines and many are making moves to reduce their costs in those facilities where these tractors are being produced. That, along with other social media attention concerning their activities in areas outside their product lines, has brought them to the forefront of national news reports in recent weeks each time there is a reduction in production facilities in the U.S.
John Deere, Case New Holland, Kubota and AGCO are companies who market their products worldwide and have production facilities around the world. The U.S. has historically been the leading consumer of agricultural tractors and combines but sales in other countries have added substantially to these companies’ total sales each year.
Each time there is a reduction of the workforce or a plant closing, there certainly are economic impacts felt within that workforce and that community.
What are the causes?
In April of this year, we produced a report entitled, “When Your Customer Disappears”, that delved deeply into the declining number of U.S. farms in recent years. With the disappearance of each farm, there was the elimination of a potential buyer of tractors within these categories.
One of the models that we employ in our annual forecasting exercise is that of a rolling twelve month average for each class of tractors and combines. This model will provide a clear view of the trend that these particular categories are taking and, as Wall Street is fond of saying, “The trend is your friend”.
The Under 40 HP category of tractors represented 62.2% of all tractors sold in 2023, which totaled 156,220 tractors, was a significant market for the U.S. tractor manufacturers. This class of tractors peaked in retail sales in April, 2021 with an average twelve month rolling total of 219,547 units and the average twelve month rolling total for August, 2024 was 139,289 units, or a -36.6% decline.
Field inventory at the dealerships at the beginning of April, 2021 was 61,330 units and that inventory level grew to 90,148 by the beginning of August, 2024 or 32%.
The 40 to 100 horsepower tractor category data showed U.S. sales peaked in November 2021 at a rolling 12 months average of 75,154 tractors. The August 2024 total for this category was 58,147 tractors, or a -22.6% decline in the number of units sold at retail since the peak on November 2021.
Inventory at dealerships across the country at the beginning of November, 2021 indicated a rolling twelve months average of 23,279 units and, while retail sales were falling during this period, field inventory levels grew to a rolling twelve month average of 41,912 units at the beginning of August, 2024. This indicated that dealer’s field inventory levels grew by 80.0% while retail sales were declining. This meant that both the dealers and manufacturers were anticipating a turn-around in sales volume that simply did not materialize.
The 2022 USDA Agricultural Census reported that farms that ranged from 50 acres to 500 acres declined in number by 60,872, or nearly 7%, from the 2017 levels but yet there is a much more significant decline in the sales of tractors in the 40 to 100 HP range; so there must be other factors in play.
Historically, an average of 7.2% of all farms purchased tractors in the 40 – 100 HP range. This average was devised from historical farm data gleaned from USDA’s Agricultural Census reports published within the past 46 years and from the AEM’s (or their predecessor’s) monthly Flash Reports of retail sales of tractors during that same period.
That would suggest that, with 814,626 farms in the 50 acre to 500 acre segment in 2023, the total number of tractors to be sold at retail in this critical category would be 58,653 in 2024, with is -15.3% below our original 2024 forecast. Farms in other acreage categories certainly purchased this size tractor, also. Our forecasting models, of which there are eight, takes into account each of the suggested annual forecast derived from each data source and then constructed a final forecast for the coming year, with recent history being more heavily weighted.
Other Factors
The USDA/RSS 2022 Agricultural Census indicated that the vast majority of farms had an off-farm source of income to help support their farming operations. The national job market has remained somewhat steady since the outbreak of COVID-19 in 2020 but many of those jobs created during that period of time were in the service industries and were relatively low paying positions. Beginning in late 2022 there were many instances of companies reducing their work force because the demand for their products were waning.
As U.S. farmers experienced a reduction in their Net Farm Income, a reduction in the off-farm income was an unwelcomed situation and was just another factor in their future equipment buying decisions.
Commodity prices influence the majority of incomes for farmers in the U.S. and those prices will fluctuate according to the various elements that make up the commodity markets. In November 2021, corn prices for the nearby future contract were reported at $5.67 per bushel while the soybean nearby contract posted $12.17 per bushel.
At the close of business in August 2024, corn prices for the nearby future contract were posted at $3.78 per bushel while soybean prices for nearby future contracts were reported at $9.82 per bushel.
This suggested that income for corn producers was down about 33.3% during that period and soybean producers saw their incomes drop by about 19.3% during this period of time, also. Grain producers represent a very large percentage of purchasers of tractors in the 40 – 100 HP tractor segment and reduced income will result in reduced tractor purchases.
The cost of financing tractors in November 2021 and earlier was negligible since many of the major tractor manufacturers’ financing divisions, along with many other lenders, were offering terms that included zero percent interest rate loans. The cost of financing today has risen dramatically with the rise in consumer inflation the nation is now experiencing and the prospects of a significant lowering of interest rates for financing is not in sight at this time.
The same inflationary pressures have increased the cost of the raw material used in the construction of these tractors and today’s models are equipped with advanced technical features that were not available in 2021. These new features have increased the cost of the individual units over the price that farmers paid in 2021 and the cost to maintain tractors today has increased.
Farmers of all kinds are now faced with an increase in the cost of input items within their operations. Seed, fertilizer, pesticides and other items necessary in the production of their crops has also increased in price and that has placed a strain upon the availability of funds used to acquire new equipment.
In reality, the rise and fall in tractor and combines sales this year is a function of the amount of money that the farmer made last year. U.S. farmers tend to be very conservative business people and, unlike previous decades, are not willing to go into heavy debt to produce a crop this next year.
Subliminal Factors
U.S. agricultural producers today are facing a potential shortage of input items, such as seeds, fertilizer and chemicals, not due to their financial abilities but because these products are now produced by manufacturers of foreign origin.
In the late 1980s, German companies, such as BASF, began to make investments in agricultural chemical companies within the U.S. and today owns many of the more popular brands of fertilizer and seed production companies that U.S. farmers utilize.
Another German company, Bayer, began to expand into the U.S. in about the same time frame and not only became a major provider of agricultural chemicals and seeds but also moved into the medical field with purchases of nationally known brands of medicines.
Canadian chemical companies have long provided fertilizer and other farm chemicals to U.S. farmers.
More recently, Syngenta was purchased by ChemChina and that included not only fertilizer and chemical products but also included Northrup King Seed Company, another very popular producer of seed utilized by the U.S. farmers. The majority interest of ChemChina is controlled by the Chinese central government.
In this time of unrest around the world, many farmers are beginning to think that they needed to secure a source for these products that are produced in the U.S. by U.S. owned companies. There is a real concern that any international incident could significantly impact their source of supply for these vital products.
Another factor that is often overlooked is the impact of the various social media outlets utilized by people around the country.
Recently, Tractor Supply Company was identified by a You Tube blogger for having engaged in Diversity, Equity and Inclusion (DEI) practices in their home office location that were not supported by their customer base. The majority of their customers can be considered to be Lifestyle Farmers and are frequent users of those various social media outlets. Tractor Supply very rapidly eliminated those practices but there was a stigma still attached to their business as a result of these actions.
The same blogger then turned his attention to John Deere and their DEI practices. As we (Glass Management Group) considered the impact that this might have on Deere, it was our opinion that only the Under 40 HP class of tractors would be impacted since those are primarily purchased by Lifestyle Farmers, who frequently used the various social media channels and whose purchases might be negatively affected by this effort. We did not feel that this would have a significant influence with production farmers who had been loyal Deere purchasers for decades.
These two incidents within the agricultural equipment industry caused many other manufacturers to review their DEI practices and become more proactive in heading off any future bad public relations that might have resulted from their activities.
While these items are certainly subliminal in nature, they do enter into the purchasing decision of farm equipment buyers and when coupled with the presence of ever increasing cost of purchasing and owning a new piece of equipment, plus the prospects of declining income, farmers will think long and hard before purchasing that new tractor under these circumstances.
Will these tractor sales return?
It is our opinion that many of these tractor sales have been lost for good. The most impactful factor is the reduction in the number of farms that will utilize tractors in the Under 40 HP and the 40 to 100 HP size and those farms are very unlikely to return. As stated earlier, each time a farm is lost, a potential buyer for this class of tractor is eliminated.
Net Farm Income, as defined by the USDA, will continue to rise and fall with the changes in the commodity markets and the world wide demand for U.S. produced agricultural products. This changing income levels will continue to provide the changing number of units sold each year in all classes of tractors but the current downward trend is likely to remain in place.
Our experience in the agricultural equipment markets has now spanned five decades and during that time the markets have done nothing but contract, with the exception of the Under 40 HP tractors, and there is nothing in view that would suggest that there will suddenly be a major increase in the number of tractors sold in the U.S.
Farmers feed the world and their farms’ average size have continued to grow in terms of acres cultivated over these past five decades, even as the number of farms decline. It is true that they have become much more proficient and efficient in their farming practices and now produce more from each acre than was produce in 1974 but all indication are for a declining number of farmers and therefore a declining number of tractors will be required for those farmers.