AKRON (Feb. 26, 2004) — After several years of low prices and listless income, U.S. farmers—and the tire dealers who supply them—may finally have some reasons to smile.
After a first half that closely resembled slow past years, the farm economy showed strong signs of recovery in the second half of 2003. That trend likely will continue in 2004, said Terry Francl, a senior economist at the American Farm Bureau (AFB) in Washington, who expects 2004 to be flat to slightly up.
“Frankly, from the farmers' perspective, (the half saw) just a more optimistic outlook for the first time now in three or four years,” Mr. Francl told Tire Business.
Farm tire dealers contacted by Tire Business have mixed expectations for the year, depending on their local economies and other developing factors, such as the first case of mad cow disease in the U.S.
Mr. Francl estimated that U.S. farmers ended 2003 with net cash income of $65 billion, up from $49.1 billion in 2002. In 2001, net income hit $59.2 billion. Mr. Francl also reported anecdotal evidence of a strong December for many farm and equipment dealers, which translates into more original equipment tire sales for tire makers and replacement opportunities down the road for dealers. Many farmers who are considering buying equipment do so at the end of the year to offset extra taxes on good yields.
Indeed, sales of all wheeled farm tractors jumped 28.3 percent in December from the year before, according to the Association of Equipment Manufacturers. For the year to date, wheeled tractor sales were up 20.6 percent last year over the year before.
However, sales of combines were down 13.1 percent in the month and off 7.8 percent for the year.
Goodyear is “cautiously optimistic” about the farm sector in 2004, according to Bill Cunningham, marketing manager, farm specialty. In mid-2003, the tire maker projected a flat to slightly down 2004, but while positive indicators shine a better light now on that estimate, Goodyear isn't yet ready to bolster it.
“Some of the prices are starting to rise, and that is good because it had been going in the wrong direction for a long time,” he said, adding Goodyear's ag business in 2003 was flat to slightly up.
Neil Rayson, manager for farm tires at Continental Tire North America Inc., said the Charlotte, N.C.-based tire maker's 2003 was up, but only by sheer hard work. Conti focused on keeping high quality, simplifying its programs, making products more available and working with dealers.
“Business was up, so that's the positive, but it wasn't easy,” Mr. Rayson said.
If several indicators stay positive, he said 2004 could see as much as a 3-5 percent gain on 2003.
Jeff Wilson, marketing manager for Firestone Agricultural Tire Division in Des Moines, Iowa, said the ag division saw a sales increase in 2003 of about 10 percent. “We showed some good growth in units and dollars in most of our channels,” he said.
In 2004, stable or rising commodity prices, OE growth, continued export demand and replacement opportunities from higher farm income may garner more growth in the farm tire sector, he said.
Bruce Doctor, manager of Nebraska Tire in Firth, Neb., said the recent down years may prove to reap rewards for farm tire dealers who stuck it out. He said many dealers have abandoned farm tires for more profitable passenger and light truck tires, but their exit from the market could mean better margins for those remaining.
“Our margins will creep up. I think the people who weathered the storm are going to see the benefits of it, but it sure hasn't been fun in the past,” he said. Nebraska Tire added three stores in 2003 for a total of 11, Mr. Doctor said, and also expects sales to climb to $10 million this year, up from $8 million last year and $6 million in 2002.
Mad cow fallout
Perhaps the biggest unknown in the farm economy is whether the report on Dec. 23 of a cow infected with bovine spongiform encephalopathy (BSE), or mad cow disease, will have lingering effects on the market. So far only the single cow has been confirmed, and the U.S. Department of Agriculture said this month its search for more cows is over.
John Linder, owner of Linder Tire Service Inc. in Iowa City, Iowa, said one of his customers said he sold a cow for $1.39 a pound before the mad cow scare. Shortly thereafter, he sold a similar cow for only 85 cents a pound. “His price really dropped,” Mr. Linder said.
Mr. Francl of the AFB said the fallout from mad cow could be as much as $2 billion to $3 billion in farmers' net income, though how the story unfolds during the year will be the primary factor. Not only are cattle producers at risk, but so are the corn and soybean farmers who sell their crops for livestock feed.
“The multiplier effect is felt up and down the chain,” he said.
On the other hand, lower retail prices and the popularity of high-protein diets such as the Atkins diet may help bolster beef sales.
“The amazing thing is that since the report of the mad cow incident in December, we have seen virtually no perceptible change in the demand for beef, which seems to remain strong,” he said.
Mr. Cunningham said Goodyear has seen little fallout from the scare.
“I haven't seen any stampede when it comes to consumers—they seem to be not scared either, so we're holding our breath, but right now it's business as usual,” he said.
Besides the mad cow situation, other factors could hinder tire makers in 2004—namely rising raw materials costs and competition from low-cost foreign imports.
Mr. Wilson at Firestone Ag said imports are becoming more of a factor, especially in the industrial sector.
“They're not destroying us by any means, but it's a factor,” he said.
Mr. Cunningham at Goodyear said numbers from manufacturers in Eastern Europe, China, India and other areas are hard to come by, but he estimated that they account for almost 10 percent of the market.
“They come in for a very economical price and in certain segments of the bias area, they have been able to get some of the price-sensitive business,” he told Tire Business.
In addition, he said rising raw material costs are making the ag industry as a whole raise prices or at least consider it. Natural rubber, for example, has increased about 30 percent recently.
Mr. Cunningham said the raw materials prices affect ag tires more than passenger or commercial tires since the former uses a higher percentage of raw rubber.
If anything's certain about the farm economy, it's that things can turn on a dime and that location can make all the difference. Mr. Linder said his two-outlet Iowa dealership was down last year, but he's hopeful for gains this year. Farmers in his area produce soybeans, corn, cattle and hogs, and some are seeing higher prices.
“I think they're going to have a little bit more money to do stuff,” he said, though he added fortunes can quickly change.
Last fall, many farmers were trying to make their equipment last following a drought while others were putting on rear tractor tires in January.
“For the most part, I think they want to get back on their feet a little bit here,” he said.
But that's not likely to happen for the small dairy farmers near Billings Service Inc. in Milaca, Minn. Owner Craig Billings said consolidation in the market has made small farmers a rare commodity. Though he expects farm tire sales to be down yet again, his overall tire sales are increasing.
“That part of the business keeps growing, and the farm business keeps declining,” he said.
In the past, farmers made a mad rush for tires at the end of the year for tax reasons. Now they wait until they absolutely have to, Mr. Billings said, adding he doesn't expect a robust farm tire business ever to come back.
Indeed, Mr. Francl of the AFB said consolidation in the dairy industry has been particularly strong.
While Mr. Billings said some local farmers used to get by with 20 to 30 cows, Mr. Francl said a dairy operation now needs at least a thousand to several thousand cows to make ends meet.
Now, the remaining small farmers seem to be only stubbornly hanging on. “The ones that are still doing it, it's just a way of life for them that they don't want to give up,” Mr. Billings said. “I don't think they're getting rich at it; they're probably just getting by.”
As a result, he said many tire dealers are dropping farm tires, though he doesn't plan to do the same before his retirement—roughly 20 years from now. “Hopefully it'll hang in there for that long,” he said.
It's a different story in Idaho, where tire dealer Max Twiss said 2003 brought a 5 to 8 percent increase, and 2004 should hold fairly flat to perhaps 2-percent growth.
“It's pretty optimistic, these farmers are right now. Our economy's not the very best, but it's been holding pretty good,” he said.
His local farmers run the gamut, from sugar beets and potatoes to beans, grains, hay and cattle. The sugar beet and potato markets are Mr. Twiss' main concerns for 2004.
“Some of them are holding back a little and others are expanding a little bit,” he said. “It's on both ends.”
At Nebraska Tire, Mr. Doctor said the dealership's growth is pegged primarily on offering farmers what they need most.
For example, farmers hit by recent down years were more interested in buying good used tires, so Nebraska Tire started including them in advertising.
Also, some large farmers are looking for “cash and carry” sales since they have their own tire mounting equipment. About 30 percent of Nebraska Tire's business is now cash and carry, he said.
“The people that remain in (the farm business), as long as they provide the variety and can keep the service up, I think they're going to see some rewards,” Mr. Doctor told Tire Business.
Two main concerns for farm tire dealers remain finding good technicians and keeping up on inventory. For the latter, Mr. Doctor said Nebraska Tire carries a wide variety of tires but in fewer numbers at each store. The tires can be transported between outlets, yet each location has some tires on hand to get farmers up and running.
For techs, Nebraska Tire has decided to offer better pay.
“It's hard work, there's long hours,” he said of the jobs. “It used to be that McDonald's paid minimum wage. Now what happens is they'll pay about what a number of tire stores are willing to pay a farm tech, and it's like there's no need for me going out there crawling underneath a combine when it's raining out when I can stand at McDonald's.”
In all, he said farm tire dealers hoping to stick it out have to be committed to the business.
“We're committed to being in that business, and we have good farm techs,” he said. “There's definitely been an upsurge because of that.”