AKRON (Feb. 4, 2014) — Since the recent recession that started in 2009, the farm segment has been looked at as a high point for the tire industry, but even as unit sales continued to grow in 2013, reduced raw-materials costs led to a relatively flat year revenue-wise.
"Business was OK," said Maurice Taylor, chairman and CEO of Titan International Inc. "The pricing dropped quite a bit because raw materials dropped…. Natural rubber came down, so that always hits your margins until it stabilizes."
Despite a near 23-percent surge in sales to $497.5 million during the third quarter of 2013, Titan's net earnings plummeted 58.7 percent for the quarter. Results were similar for the first nine months of the year. The company said the sales boost was partially offset by a price/mix reduction resulting from reduced raw-materials costs.
Carl Casalbore, president of BKT-Tires (USA) Inc., agreed that reduced raw material costs had a negative impact on tire pricing in 2013.
"2013 wasn't exactly stupendous, but it was decent," Mr. Casalbore said. "Business was up a little — not much — from a unit perspective. From a cost or revenue perspective it was a little bit down. Prices definitely are coming down.
"Part of it is due to competition, part of it is raw materials and part of it is just the view of getting more market share," he continued. "All-in-all…it was a good year, a fair year. Could it have been better? Absolutely.
"Could it have been worse? Sure. But we were OK with it."
Joe Inchiostro, CEO of St. Louis-based St. Louis Wholesale Tire, said sales on the wholesale end were "pretty flat" in 2013 and excess supply was a problem.
"A lot of manufacturers have added capacity, there's more competition from abroad and more players getting into the market, raw material prices have been stable," he said. "So with stable prices and increased supply of tires to the end-user, we now have a very price sensitive market.
"…In 2011 nobody could keep up, and then all the (tire) manufacturers started increasing capacity and people that hadn't made farm tires before were like, 'We need to get into that market,'" he said. "The pendulum swings, and now all of a sudden there's increased supply and soft demand. Like everything else in the business world, it's cyclical."
Mr. Inchiostro said for distributors that managed their inventory well over the last few years, the price decline hasn't had too much of an impact on business, but it can be challenging in that it allows consumers to be more discretionary with their purchases.
"It's good for the market that supply is good because it gives people choices and options, but then you have to focus more on educating the consumer because you get the low-tier options and you have to start to educate people on the value of the product," he said. "You get what you pay for."
While prices have stabilized in 2014, expectations for tire sales for the year ahead are mixed.
"What we're anticipating is a fairly strong year, not only from a consumer sentiment standpoint but also from a revenue standpoint," Mr. Casalbore said.
While much of the segment's performance depends upon the weather, "as a general rule we believe that the economy is picking up, we believe that the world economy is picking up and we believe that farming is going to be a big part of the economy picking up," he said, "especially with exports, crops and also with ethanol becoming more and more part of our fuel trend for every day vehicles.
"We think it's going to be a fairly strong year."
The U.S. Department of Agriculture (USDA) has forecasted net farm income to reach $131 billion in 2013, up 15.1 percent from the estimated $113.8 billion in 2012. It would mark the highest net farm income level since 1973, adjusted for inflation.
Net cash income is forecast at $129.7 billion, down 3.4 percent from the 2012 estimate, but still high by historical standards.
Equipment sales also were strong for the year. According to the Association of Equipment Manufacturers' (AEM) December 2013 Flash Report, sales of two-wheel-drive farm tractors in the U.S. improved 9.5 percent over the same period in 2012, with 100-plus-horsepower vehicles leading the category with a 17.6-percent boost. Self-propelled combine sales also increased 9.8 percent for the period.
Four-wheel-drive farm tractor sales were the only category to decline — down an estimated 0.4 percent — but total tractor sales increased by an estimated 9.1 percent.
Canada's results for the same period were similar, with an 8.9-percent increase in total tractor sales, including a 14.5-percent boost in the 100-plus-horsepower category. Self-propelled combine sales increased 1.7 percent.
Mr. Casalbore said that in 2013, BKT's OE and replacement unit sales were up, but OE grew by a higher percentage.
But farmers may be looking to tighten their belts in 2014, as prices for corn have declined from a record high of $8 per bushel to just over $4 within the last two years.
In its 2013 annual report, farm equipment manufacturer Deere & Co. predicted sales of ag machinery in the U.S. and Canada will decrease between 5 and 10 percent in 2014, reflecting an anticipated drop in demand for high-horsepower tractors and combines.
"Although commodity prices and farm incomes are expected to remain at healthy levels in 2014 by historical standards, they are forecast to be lower than in 2013," according to Deere.
"The company believes the decline will have a dampening effect on demand, primarily for large farm equipment," it said.
In addition, changes to the U.S. tax code this year have reduced depreciation limits for business equipment purchases, something that Mr. Inchiostro said he believes may have impacted farm equipment sales last year.
With the passage of the H.R.8: American Taxpayer Relief Act of 2012, Section 179 of the IRS tax code was enhanced in 2013 to allow businesses to deduct the full purchase price of qualifying equipment with a $500,000 deduction limit, according to Section179.org. In addition, 2012's limit of $125,000 also was raised to $500,000 retroactively.
For the 2014 tax year, Section 179 has been restored to its original limit of $25,000, along with an adjustment for inflation, according to the website.
Mr. Inchiostro said he knows two farmers who purchased equipment in 2013 as a direct result of the depreciation rule change.
"The tax incentives are nuts and bolts," he said. "If I can buy a piece of equipment and I can depreciate ($500,000) this year, but next year it may just be $25,000 and I'm on the fence, I'm gonna buy it now."
However, even if OE sales are down next year, farmers still need tires for the equipment they have.
"Without tires nothing happens," Mr. Casalbore said. "Really, nothing happens. It's almost like fuel—if you don't have fuel to drive a vehicle, you're not going anywhere. Well if you don't have a tire to roll on a wheel, you can't go anywhere….
"The good thing about a tire is that it wears out, so there is repeat business."
To reach this reporter: firstname.lastname@example.org; 330-865-6148.
What do you think of the tax reform proposal before Congress?
|I’m in favor of it—it’s good for business||
29% (27 votes)
|It doesn’t go far enough in helping small business.||
12% (11 votes)
|I’ll wait to see the final bill.||
19% (18 votes)
|It’s going to hurt the middle class.||
40% (37 votes)
|Total votes: 93|