Farm equipment manufacturers report strong sales heading into the fourth quarter of 2013. According to the Association of Equipment Manufacturers’ latest report (issued in August), U.S. unit retail sales showed double-digit growth in most categories of equipment, as high crop prices and tax incentives gave farmers two big reasons for spending. Tractor sales were up 13% and combine sales up 27% year-to-date compared to the same period in 2012.

Next year’s sales, however, are expected to see some softening as the same factors credited for growth in 2013 start to reverse in 2014. For example, commodity prices, which reached record highs in 2012, have dropped 35% for corn and 14% for soybeans at latest report. A drop in prices usually means a decline in net cash income, which is a key determinant of farm equipment sales.

Ann Duignan, an analyst with J.P. Morgan, noted in her midyear report that there is a high correlation between farmer cash receipts and equipment sales. She stated that cash receipts may have passed their peak and forecast a 12% drop in tractor sales going forward (see charts).

Another factor that could slow sales in 2014 is a change in the current tax code. This year, farmers could deduct $500,000 a year from their income taxes for equipment purchases up to $2 million. They also could claim what’s called a “jumbo” depreciation allowance on new equipment. These tax incentives, which helped drive the recent run in sales, are scheduled to expire on Dec. 31, which analysts say could curb spending patterns in 2014.

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“I’d say there is cautious optimism because of these unknowns,” said Charlie O’Brien, AEM senior vice president, in late September.

The benefit to buyers, according to analysts, is that rising inventories — if machinery makers can’t flex fast enough — could lead to some deals for farmers who have cash on hand. The rising level of used equipment is also offering a potential for deals.

Price tags on equipment are difficult to predict. But averages calculated over the last 40 years can provide hints, say the agricultural economists we talked to.

“Using historical USDA input price indices, machinery prices increased 4.65% per year from 1973 to 2013, and 5.94% per year from 2008 to 2012, the last five years,” says Michael Langemeier, an agricultural economist at Purdue University. “Given relatively lower crop prices and the potential for higher interest rates, it seems logical to assume that price pressure will not be as great in 2014 as it was during the last five years.”

The potential price drop applies especially to used equipment prices, which have been high the past few years. New equipment prices may be a different story because of the high costs associated with Tier 4 engines, required in all farm tractors starting in 2014. Estimates vary, and manufacturers are hesitant to give a number. But a recent survey of dealers, conducted by Farm Equipment, shows that they expect pricing on new farm machinery to increase by 4% to 6% or a bit more in 2014, largely due to Tier 4 engine costs.

The bottom line for farmers, economists say, is to consider the economics before making their buying decision.

Langemeier says it also is important to look at the implications for future asset purchases.

“When crop margins tighten and interest rates increase, it is particularly important to closely examine asset purchases such as machinery, building and land purchases,” Langemeier says.

“These asset purchases are generally paid for with future cash flows. Locking oneself into a higher cost structure, due to asset purchases, is not something a firm wants to necessarily do in this new environment.”