As the lower 48 states experienced the third hottest summer on record and nearly 80% of agricultural land has been affected by the first major drought since 1988, many AEM member companies may be wondering what effect this will have on equipment sales.

Based on data compiled by AEM’s market intelligence staff, the short answer is – it may not be as significant as many think.

First, a major driver of equipment sales is farm income. When looking at past droughts, the impact on farm income has been minimal, even in years where crop insurance was carried by only a minority of farmers (18% in 1988 versus 84% today).

Second, income isn’t the only factor. Since much equipment is financed, availability of credit, with farmers’ eligibility to get credit and their ability to pay, are all factors.

The USDA states that farm equity is forecast to reach an all-time high while real estate debt declines. Debt repayment capacity utilization (DRCU) – a measure of farm exposure to financial risk – is forecast to be at its lowest since 1970.

As can been seen from the chart below, DCRU was a factor in the farm crisis in the 1980s. Essentially there was too much debt and too little income to service it. That is not the case today.

AEM’s own survey results confirm that the credit crunch of 2009 has eased. Less than 10% of AEM members reported hearing of problems obtaining credit.

While the future is hard to predict, there is little reason to expect equipment sales to be negatively affected by the drought of 2012.