Weston Hetland’s tractor sales soared during the pandemic and the war in Ukraine, but the buoyant years are in the past— rising interest rates and falling commodity prices are cooling the agriculture machinery market.
Even in 2023, Hetland, a John Deere salesman in central Missouri, had solid business, despite a drought that hurt crops in the area. Hetland has already seen, however, early signs that higher borrowing costs are slowing sales.
“My clients are small farmers, not big companies,” Hetland said. “If they have to borrow money at double the rate, that certainly changes their idea of spending on renewing equipment.”
The COVID-19 pandemic boosted the U.S. agricultural machinery market to an all-time high, as small farmers had available money to invest in equipment. The war in Ukraine provided additional fuel due to commodity price spikes, which lined farmers’ pockets. Rising interest rates and falling international prices have eroded market strength, and farm equipment manufacturers are trying to cut costs or launch promotions to adapt to the new scenario and improve their profitability.
Industry’s drivers during the pandemic were small tractors —less than 40 horsepower—, which are almost one in four units of farm equipment sold. Sales of small tractors peaked in 2021 and have since fallen. Between January and November 2023, they registered 27% lower volume than in the same period two years before, according to data from the Association of Equipment Manufacturers. Sales of other types of equipment, such as combines and large tractors, continued to increase.
During the pandemic, small farmers brought low-power tractors for the same reason households invest in improving their homes, said Curt Blades, senior vice president of agriculture services and forestry at AEM.
“As they weren't able to travel, they spent on equipment,” he said.
That changed as the pandemic economy returned to normal, commodity prices came back down and the effects of high interest rates began to be felt in the sector.
Since March 2022, the Federal Reserve has raised the interest rate 11 times in an attempt to curb inflation, the highest in four decades. Although it was effective at cooling price increases, it also made financing more expensive. This affects families buying houses or cars, but also companies renewing machinery. Or farm equipment.
The market expects interest rates to decline next year. Investors see a 55% likelihood that the Fed will begin cutting rates at the May 1, 2024 meeting, according to the CME FedWatch Tool.
Sales of big farm machinery, such as tractors and high-powered combines, continue to grow despite rising interest rates because large agricultural companies invest to keep their technology up to date, Blades said.
Innovation is one of the key long-term drivers of the farm equipment industry, according to a November report from Zacks Investment Research.
"Given the escalation in labor costs every year, farmers are resorting to farming equipment to replace labor," the report said. "The need to replace aging equipment will sustain the demand for the industry."
In the last few decades, farm equipment manufacturers have invested in precision agriculture, which allows seeding seeds and applying fertilizers or herbicides with a high degree of efficiency. In 2021, CNH acquired Raven Industries, a company focused on precision farming, and this year it bought Hemisphere, a firm specializing in satellite positioning, a key technology for autonomous equipment that could lead to driverless machines.
Small farmers could become decoupled from cutting-edge technology. More Missouri farmers are considering buying used equipment, according to Hetland.
To mitigate the drop in sales, Deere launched cheaper financing promotions. Other companies followed the same strategy, such as Caterpillar, the giant mining and construction equipment manufacturer, which also has farmer customers.
Over the past 12 months, major companies in the farm equipment sector performed worse than the market average. Shares of industry leader Deere fell 9.5%, AGCO's were down 6.9% and CNH's plunged 25.6%, while the S&P 500 index rose 24.8% over the same period.
CNH's hard decline is a consequence of the company's margins being significantly lower than its rivals, according to industry experts. CNH announced in November that it would lay off 5% of its workers, to cut costs and improve competitiveness.
The stock's poor performance relative to the market average reflects pessimistic expectations for the coming year, according to analysts. Despite that, Deere, AGCO and CNH have increased their revenues and net profit in 2023. Deere earned 41% more, AGCO 37%, and CNH 17%.
Deere also announced in October that it was laying off 10% of a harvesting equipment plant in East Moline, Illinois. However, this decision was related to a strike that lasted for two years and is not a direct consequence of expected market cooling.
Industry experts consider that, despite downward expectations for next year, the sector will recover by 2025. Therefore, attempts to cut costs would not result in massive layoffs in the major companies.
"Due to supply chain concerns after the pandemic, we learned a lot about just-in-time versus just-in-case production, but companies have been careful not to oversaturate the market," Blades said. "They have made good decisions and I don't think we will see massive layoffs. There are still worker shortages in factories."