The retail market and the auction market are not separate entities; they are intricately linked, influencing each other in a dynamic interplay of supply and demand.

This complex relationship was particularly evident during the economic downturn from 2014 to 2017 when high inventory levels and falling commodity prices drove buyers to seek out lower-priced options.

Leasing Boom

From 2014 to 2017, the farm equipment market experienced a leasing boom, with a record number of leases written for both new and used equipment. Creative financing options emerged, offering buyers affordable payment terms ranging from 1-5 years. 

At the end of these leases, machines were typically returned to the lessor, which could be a manufacturer’s captive finance arm, a local bank or an agricultural lender.

During this period, high inventory levels meant that the largest owners of used equipment were not dealers but manufacturing captive lending arms, banks and agricultural lenders. 

These organizations held billions of dollars’ worth of inventory, which was only visible to a few entities. In contrast, today, dealers are the largest owners of used equipment.

As inventory levels surged, buyers began to explore auctions in addition to dealer lots. For example, if a dealer was selling a combine for $175,000, and the same machine could be bought at auction for $100,000 or $125,000, buyers would often opt for the auction. Several factors influenced this decision beyond price, including trade-in equity positions and comfort levels with auction purchases.

The 120% Rule

A critical threshold was observed: when the retail price exceeded the auction value by more than 120%, buyers predominantly sought out auction prices. From 2017-20, the retail and auction markets aligned more closely, with retail prices averaging 115% to 107.5% of auction values. Despite this alignment, the auction market remained active due to high supply and ample buyer options.

The COVID-19 pandemic from 2020-23 disrupted this balance. During the pandemic, auction prices often exceeded 120% of retail prices on dealer lots. This was partly due to dealerships holding back equipment to ensure availability for local customers during emergency breakdowns. The scarcity of supply and high demand led to what was termed the “scarcity premium,” with prices soaring by 30-60%.

Today, various factors, including commodity prices, interest rates and inflation, are influencing current market conditions. Supply has caught up with demand, giving buyers options reminiscent of the last downturn. 

The auction and retail markets are out of sync again, with retail-to-auction values exceeding 120% for combines, tractors, sprayers and planters. High new equipment prices are reflected in used equipment values, which are traded daily as commodities. Consequently, losses on equipment at auction can be significant, affecting both dealers and end-users.

Current used inventory levels are comparable to those in 2021-22 and are expected to grow through 2025. Levels may reach those of 2019-20 before stabilizing in late 2025 or early 2026. 

The auction market is anticipated to continue driving down retail prices until a new equilibrium is reached, though this “new normal” may differ from past market conditions. Used inventory will compete directly with upgrades, impacting the overall market health.