WASHINGTON, Oct. 19, 2016 - Facing a poor economic outlook, North American agriculture equipment dealers must transform in order to improve returns on invested capital, according to a new report from the Rabobank Food & Agribusiness Research and Advisory group.
The report, “The Dealer’s Choice: Options for Equipment Sellers to Reinvent Themselves,” notes that equipment dealers are facing a third straight year of declining sales, contracting net income and weak intermediate demand outlook. And it points out that while the industry’s leading players have already reduced inventory levels, consolidated stores and are emphasizing ancillary services, growth remains a challenge, given negative farmer cash flows.
“Dealerships must reinvent themselves for the future and will have to pursue product extension strategies, including partnerships with ag technology companies, to thrive and survive,” notes report author Kenneth S. Zuckerberg, a senior analyst at Rabobank.
Zuckerberg points to the ongoing decline in average prices for the three major U.S. crops – corn, soybeans and wheat – as the key factor causing pressure on income. For corn, the country’s biggest crop, Rabobank sees a 75 percent probability that prices will remain at or below $4 a bushel on average over the next five years.
As a result, he says, Rabobank continues to forecast declining sales of tractors, combines and other ag equipment through 2017 “as farmers adjust to what we project will be five years of near breakeven operating margins.” Rabobank’s model does not see any meaningful new equipment purchase activity until early 2019, based on debt interest coverage ratios.
Given that farmers are becoming increasingly cost-conscious, the report warns that for equipment dealers, “stagnation is a risky strategy.” And it goes on to explore options dealers can, and are exploring, including service capabilities, increasing the sectors served, selling and servicing high-tech equipment, expanding insight and increasing the variety of products sold.
“These dealerships will continue to face growth challenges as customers adjust to a new reality of lower commodity prices and income,” Zuckerberg says. There are opportunities for forward-thinking dealership groups, but courage and conviction will be key during the current period of financial stress and farmer anxiety.”
Some suggested options for dealers to consider:
- Adding greater parts and repair service capabilities, given the longer work lives of field equipment in circulation;
- Selling small and medium-sized equipment geared toward sectors beyond row crop farming, as well as industrial equipment and products for residential consumers such as lawnmowers;
- Selling and servicing new emerging high-tech equipment, including autonomous tractors, drones and robots;
- Providing value-added fee-based agronomic extension advisory services to the dealers’ existing customer base.
Data from the Association of Equipment Manufacturers confirm the bleak picture for sales of large agriculture equipment. Combine sales in the U.S. were down almost 35 percent in September from the same month in 2015 while year-to-date sales through September were down 24 percent from the previous year. Sales of new large tractors were also down significantly.
“Given excess equipment inventory and low crop prices, recovery won’t be overnight, but the downward trend in inventories is financially helpful for the entire supply chain as inventories are moved through the distribution channel,” said Charlie O’Brien, AEM’s senior vice president and Ag Sector lead.
“While our current ag downturn is the result of lower commodity prices putting pressure on farm income, weak exports due to a strong U.S. dollar, and overall global economic malaise, we cannot underestimate the impact of inventories at the manufacturer and dealership level,” O’Brien said.
#30
For more news, go to: www.Agri-Pulse.com
