Staying on top of the local ag economy is akin to keeping an eye on your neighbor's field. You might get the information you need but drive off the road in the process.
Farm equipment companies face a similar challenge in balancing supply and demand. Rather than keeping tabs on a few neighbors, equipment companies have to track thousands of farmers and guess how many — and which ones — are likely to buy a new tractor anytime soon. Sometimes they guess correctly. Sometimes they hit an unexpected fork in the economic road.
Evidence John Deere and its recent curtailment of tractor production, including a one-week shutdown of its Waterloo, IA, tractor factory. “Continued caution on the part of our customers has prompted our decision to reduce production schedules,” says John Deere CEO Robert Lane. “Our decision to cut back production schedules in advance of the important spring selling season is a difficult one.”
Deere's announcement cast a pall over the earlier cautiously optimistic projections made in January by the Equipment Manufacturers Institute (EMI), which polls 43 key agricultural companies. EMI's State of the Ag Industry Outlook for 2001 predicted that sales of high-horsepower 4-wd tractors would increase by 3.1% this year.
Bill Fogarty, editor of Ag Industry Watch newsletter, noted that a down trend in tractor sales became evident in December, with the month's sales of over-100-hp tractors dipping below 1,000 units for the first time in years. In the earlier part of 2000, Deere had numerous product-moving incentives at work to bite off a bigger share of the tractor market. Some of those programs ended in December with the start of Deere's 2001 fiscal year.
“I really thought that Deere would continue its market share blitz in 2001,” Fogarty says. “Now that doesn't appear to be the case. I'm just mystified by what's happening now.”
Another faction interested in farmers' buying decisions is university-based ag economists. One such group, the Center for Agricultural Business at Purdue University, recently surveyed 1,700 farmers about their buying habits. It found that even though 73% of large operators (defined by the survey as those with gross annual sales exceeding $500,000) were aware of price differences among dealers, fewer than 20% based their purchases of capital items on finding the lowest price. According to the Purdue survey, honesty was the number-one characteristic that farmers valued in the “best” agricultural sales representatives they knew, followed closely by technical competence, good follow-up and relevant information.
Our own Farm Industry News online survey of 300 farmers showed somewhat different priorities in tractor-buying decisions. In that survey, farmers rated price as the number-one consideration, followed by performance and service. That's not to say performance and service aren't important. Additional FIN survey responses about where and how the farmers buy tractors indicate dealer service plays a significant role in their decisions. The largest percentage of respondents (43%) said they buy their tractors used from a dealer instead of from another farmer, at auction, over the Internet or from some other source. Thirty-five percent (the second largest percentage) said they purchase a new tractor from a dealer.
Farmers aren't by any means on a tractor-buying spree. Those in our survey group said they expect to keep their tractors an average of 12 years.
Averages, however, do not account for individual farmers whose not-so-common strategies might set the next trend. So in an attempt to zoom in from the stratosphere of broad-brush survey responses and industry reports, we visited with two farmers with very different philosophies on the art and science of equipment purchases.
Keep ’em moving
Sullivan Farms Inc., a corn and soybean operation near Franklin, MN, plans to continue upgrading to new combines and tractors on a regular basis. The joint father-and-sons operation owns two 9650 John Deere combines and several newer model John Deere tractors, including an 8210, 8110, 8100, 7810 and 4430. For nearly 10 years, Mike Sullivan has purchased a new John Deere combine, used it for a season and then sold it to his sons Tim and Pat, who use the combine for a season and then sell it.
“We like having new equipment because of the one-year warranty,” Tim Sullivan says. “We can't afford to waste valuable time on repairs and breakdowns. And as long as we have the money available to do it, we think buying is better than leasing. We've found that we tend to go over on hours with a lease and end up buying the machine at the end of the contract anyway. Buying new and reselling seems to make the most sense when John Deere products tend to hold their value well for resale. And by buying new, we also take advantage of Deere's program for nine months of interest-free financing. We end up paying only three months of interest for the year.”
New technology is another reason the Sullivans like to upgrade their machinery on a regular basis. “The Deere tractors keep adding new technology that pays for itself, if you're willing to learn to use it,” Tim says. “The new machines will perform several functions at the touch of one button, so we have a lot better implement control than we used to. That makes for more accurate seed and fertilizer placement. And I know the parallel swathing system we're going to use for incorporating chemicals will save on input costs by reducing overlap.”
Buy and hold
Carl Johnson runs two Finnish-made, 205-hp Valtra tractors on his corn and soybean farm near Sidney, IA. He's liked many of the Deere and Case tractors he's owned over the years, and he says both the local Deere and Case dealers have treated him well. However, that wasn't enough to keep Johnson from changing his tractor-buying philosophy and his brand loyalty in recent years.
“Soon after the one-year warranties expired, lots of little and expensive things always seemed to go wrong,” Johnson says. “Repairs are costly and time-consuming, so I decided that it still makes sense to buy a new tractor. But since I also like to keep the tractors I buy for several years, that meant I had to find a more reliable machine with a longer warranty. The Valtra Valmet's five-year warranty option got my attention. Then when I drove one, my days of loyalty to green and red machines ended.
“The Valtra was not as big and bulky as my old tractors, yet it had more usable power,” Johnson continues. “Best of all, at $84,000, the 4-wd Valtra cost about $30,000 less than a comparably equipped domestic tractor. Some additional Valtra features, including the front 3-pt. hitch for my 60-ft. spray boom, air-ride assist and easy-to-shift, 21-speed transmission, let my Valtra do double duty as a spray rig. That saved me at least another $50,000 by not needing to buy a self-propelled sprayer.
“Since Valtras are fairly new to the American market, I'm not sure what the resale value will be when it comes time to sell, but I haven't had a breakdown yet, and I figure I've saved a lot of money up-front no matter what happens.”
Johnson points out additional savings on fuel as well. He estimates the lighter machine gets 10 to 20% better fuel economy than his old tractors. Last fall, Johnson bought a second Valtra Valmet at a discount as a demo. He plans to buy the next higher-horsepower model Valtra when it becomes available.
Web wisdom of tractor buying
There's a lot of advice on the Internet about how and why to buy a new tractor. We sorted through some of it to bring you the highlights.
www.tractorsmart.com First, define what you expect the tractor to do. What was right for your father or your neighbor is not necessarily the best choice for you. There's enough variety out there in both new and used tractors that you shouldn't have to settle.
If you need to cut costs, write down which features are absolutely necessary and which are merely nice to have. Before cutting features, consider the conditions you'll likely be working in and how many hours you'll be spending in the tractor seat.
If you buy a new tractor, make sure it really does have everything you assumed it would from reading the factory literature. Make a list and check off each item as the salesperson points it out to you.
www.aes.purdue.edu/aganswrs For machinery, tax laws favor selling — not trading — old machinery. A farmer buying a new tractor can claim depreciation and lower his taxable income and self-employment earnings. Selling a fully depreciated asset may reduce your tax bill over time.
www.thewealthyfarmer.com Don't make a tractor investment decision solely to avoid income taxes. Buying a new combine or tractor to evade the tax man often results in overcapacity. That might take a bite out of your bottom line two or three years down the road.
Surround yourself with a team of financial advisors, including a banker and an accountant, who can help you succeed.
It's important to adopt new technology, but it should be technology that can produce measurable results. Technology is racing ahead of financial management, and it's creating problems.
www.farmdoc.uiuc.edu Consider how many hours your new tractor will work. The majority of overhead costs from a tractor are in depreciation and interest. These factors are relatively constant. If you can use the tractor for more hours, your overhead cost per hour decreases.
Steve and Connie Webb
Interest-free equipment financing may sound good, but check the terms carefully. Many financing contracts contain a clause that says the interest for interest-free months will be recaptured by the financing company if the loan is terminated for any reason. Depending on the contract, “termination” can also include deals where you trade in a tractor and roll over the loan. The result? The recaptured interest is often added to the new loan as principal, rather than interest. Not only do you pay the interest you thought you'd avoided, you lose the tax benefits as well. To avoid similar traps, always read the fine print and consider keeping your records on a good double-entry accounting system. One source of financial management software designed specifically for farmers is available from FMS/Harvest. Contact FMS/Harvest, Dept. FIN, 1200 E. Lincoln Hwy., New Lenox, IL 60451, 800/992-2814, www.fmsharvest.com.