Strong outlook for italian farm machinery sales in the United States

Net farm income in the United States will come to $113.2 billion by the end of the year, the lowest since 2010. The decline is due mainly to the reduction of cereal prices. This factor, together with the decline of federal subsidies and the reduction of incentives for speeding up depreciation for the purchase of new machinery have resulted in a drop in sales of tractors and combine harvesters. In the first eight months of 2014, however, agricultural machinery imports rose 6% and those from Italy gained by 23,6%

After several years of robust growth, partly driven by farmland values and a run-up in prices for many agricultural commodities, the revised 2014 net farm income is set to be $113.2 billion, down 13.8% from 2013. This makes this year’s net farm income the lowest since 2010, but still $25 billion above the 10-year average. The decline in income is mostly due to a drop in commodity prices. Crop receipts are expected to decrease more than 7% in 2014, led by a projected $12.8-billion decline in corn receipts and a $6-billion decline in soybean receipts. Livestock receipts, on the other hand, are expected to increase 15% in 2014.

The biggest decreases in net farm income can be found in the central region of the United States where farm commodities such as corn, wheat and soy beans are large crops.  Therefore, while the farm economy might still remain strong, the farm machinery industry has been more strongly impacted by the downturn.

Naturally, to understand the current situation, it is important to take a brief look at some of the factors causing the downturn. While lower farm incomes have certainly been a driver, there is more to the current downturn than just low commodity prices.

First of all, capital expenditures on machinery are expected to decrease from past heights due to a change in tax incentives and subsidies. Under the expired bonus depreciation, farmers could minimize taxes through additional machinery purchases. However, most tax experts predict that the above tax incentives will be reinstated after the November general elections. Additionally, subsidies are changing as the new US Farm Bill is replacing the fixed subsidies with a new scheme.

Secondly, farmland values are rising at a slow pace, limiting the farmer’s ability to use this as collateral and thus reducing their capacity to get credit

Third, the used equipment market has become inflated as more farmers are offloading equipment they turned over during the strong cycle of past years. While some sources are indicating record prices for used equipment due to the low amount of hours logged, in general, higher inventory of used equipment is still driving down the price to below what the machine is worth. The large inventory of used equipment sitting on dealer lots is not only decreasing the ability of the dealers to purchase and finance new equipment, but is also lowering the value of the trade-ins farmers tend to use when buying new equipment. Dealers might go so far as to not accept used equipment for trade-ins. The fact that some large companies are offering sales incentives such as free warranties on used equipment illustrates the urgency to get it off the lots.

According to figures recently released by the U.S. International Trade Commission  total imports of farm machinery during the first eight months of this year increased by 6% in value, year to date, while imports from Italy surged by 23,6% to reach a market share of 10%. Moreover, with the exception Japan, Canada and Mexico whose exports to the U.S. respectively registered a decline of 4%, 4% and 1%, a general improvement in sales was experienced by Italy's principal competitors: Germany +0,3%, China +11% and France 38% (Reported in tab the values in millions of dollars and U.S. market shares held by the nation's major foreign suppliers).

 

 

 

 

The leading segment of Italian export of farm machinery to the U.S. is still gear boxes and drivelines for farm implements which, in the first eight months of this year, rose by 3% and account for approximately 15% of total exports of Italian farm machinery and parts to the U.S. Other significant compartments for Italian agricultural machinery exports to the U.S. are: mowers (+62%); soil preparation and cultivation machinery (+34%); harrows (+44%); forage harvesting machinery (+34%); seed drills and transplanters (+17%); sprayers (0,3%). Running counter to the trend are: fertilizer spreaders (-7%); tractor parts (-12%); tillers (-20%).

It is also important to point out that the recent increase in U.S. imports of farm implements also coincides with an increase in sales of farm tractors under 100 horsepower while, during the first 8 months of this year, sales of farm tractors over 100 horsepower and 4WD are down 11.2% and 37,4%. Therefore, the current weakness in the sales of large tractors and combines will result in production cut backs and in the aggregate demand for foreign made component parts.  This of course will impact negatively the large number of Italian manufactures that are quite active in this market segment.

Lastly, it should be noted that in recent years foreign competitors from China, South Korea, India, Brazil and Turkey have been very successful in positioning themselves as low cost suppliers.  This trend leaves Italian companies that wish to maintain their market share in the U.S. only one choice: implement a competitive strategy that is based on very high product quality and excellent customer service.

According to experts in the sector, the current decline in the prices of cereal commodities and the repercussions of ongoing drought conditions in the State of California will lead to a downturn in value of U.S. farm production compared to the previous year. In addition, falling energy prices are having an impact on farmers who have been betting in recent years on their corn crops grown for the production of ethanol. We feel that in the future this trend should convince farmers to return some acreage to crops of importance for Italian manufacturers, such as forage and fruit and vegetables. 

In fact, according to a recent market survey of equipment dealers conducted by Farm Equipment magazine, livestock producers and particularly those in the cattle business are experiencing strong growth and as a result are driving higher the sales of hay tools and feed mixer wagons.  The strong growth in this market segment is expected to translate into a significantly higher demand for said equipment in 2015.  As the U.S. economy will gain strength into next year, higher sales are also expected in the lawn & garden equipment market segment.

Considering that farmers replenished their stocks in the latest cycle and given the forecasts for farm income, the decline in subsidies and tax benefits, the forecasts for farm values, the underlying declines in commodity prices and the state of the used equipment market, we are looking at a multi-year adjustment from our current historical heights for sales of farm equipment in the U.S.

For Italian manufacturers the market outlook appears promising, particularly from the stand point of increasing competitiveness deriving from a favorable euro/dollar exchange.