There's a customer segment out there ready for harvest by tire dealers and-for once-it's farmers, who scored a whopping $76.5 billion in income last year.
With help primarily from high commodity prices, farmers had a banner year, hitting the record estimated income level, said Terry Francl, a senior economist at the American Farm Bureau. Farmers posted income of $68.8 billion in 2003, and most government projections had anticipated a more modest level in 2004.
For tire makers and dealers, that's been music to their ears.
``(Farmers) had three or four years of really hard times, and that always creates a pent-up demand for equipment and tires because they made do when times are hard,'' said Neil Rayson, president of CGS Tires U.S. Inc. The firm's Czech parent CGS Group last year bought Continental A.G.'s farm tire business and the rights to the Continental, Barum, Euzkadi and Semperit ag tire brands.
``Now they've had a good year-and this year looks as though it's going to also be promising-and that pent-up demand for tires and equipment unwinds and you get this surge that we've got now.''
With those high prices, government subsidies also were down, suggesting farmers were doing well on their own.
``Their reliance on government payment was down in '04, and a lot of it was driven by commodity prices,'' said Jeff Wilson, marketing manager at Firestone Agricultural Tire Division. ``(When) farmers have disposable income like that, they're going to be more apt to buy equipment.''
Tad Bauer, executive vice president of marketing and logistics at 27-outlet Bauer Built Inc., said the Durand, Wis.-based dealership's ag business was up 6.8 percent in 2004, and 2005 could bring double-digit growth. January-not usually a strong farm month-was busier than usual. ``So it's a pretty good indicator that we will see some nice growth in 2005 as well,'' Mr. Bauer said.
Perhaps the only question is how long the party will last.
Mr. Rayson expects the growth to continue in 2005. ``There's very strong OE demand and there's very strong replacement demand,'' he told Tire Business. ``It's difficult to tell when it will flatten out, but there's no sign of its slowing at the moment.''
In fact, Deere & Co. in its annual report said the company anticipates its equipment sales in 2005 to grow 2-7 percent. The first quarter alone is expected to soar 20-25 percent ahead of the '04 period, with production levels increasing 11-13 percent in the quarter. The farm equipment manufacturer's net sales hit $20 billion in 2004, 29 percent ahead of 2003. Net sales in the Equipment Operations unit grew 33 percent over 2003.
According to the Association of Equipment Manufacturers, sales of combines soared 44.3 percent in 2004 over the previous year. Sales of farm wheel tractors grew a more modest 12.5 percent.
Jeff Vasichek, general manager of farm tires for Goodyear, said he anticipates farm tire industry growth of 5 to 7 percent at OE and 3 percent in replacement this year.
But some industry watchers are hedging bets. Mr. Wilson expects 2005 to be another good year, but he's uncertain about 2006 and 2007. Michelin North America Inc. said it expects 2005 to be flat to slightly up. Mr. Francl said farm revenues in 2005 could drop off slightly to about $71.4 billion, though anywhere around $70 billion would still be considered strong.
``We just had such a big increase this past year, and it's just hard to keep prices at that level for a sustained period of time,'' he said.
Mr. Francl added that the high yields this past fall already have put some downward pressure on prices. Livestock prices also could come down if Canada's beef returns to the U.S. after it was embargoed in May 2003 following the discovery of a case of bovine spongiform encephalopathy (BSE), or mad cow disease. That factor could be offset if U.S. beef returns to the Japanese market after a U.S. case of BSE in December 2003.
Farm income also could be mitigated by the same rising costs facing everyone-namely fuel and energy. At the same time, government subsidies should increase this year, perhaps to as much as $22 billion from $9 billion last year.
``Farmers, financially speaking, after a couple of pretty good years are in better shape than they have been since the mid-'90s,'' Mr. Francl said. ``So although they are likely to be more cautious as the year goes on, I don't foresee that they're going to be totally pulling back in terms of their expenditures.''
But Mr. Vasichek argued the farm tire business' cyclical nature may be altered because of its global nature. He said Brazil has seen high growth, followed by Europe and Asia. Brazil alone expects to increase its tillable acres 150 percent, according to a report in the Ag Industry Watch newsletter. With this global landscape, he said he thinks the current positive market could continue through 2007. Even China is opening up more with Goodyear tires OE on tractors exported to the country.
``We're going into that market with our OEM partners,'' he said, adding Goodyear doesn't sell direct to China.
Mr. Wilson said global export also could help farmers themselves, as China in particular is looking at importing grains.
Inevitably, the surge in business carries its own set of difficulties.
Dick Liechty, farm service manager at Zurcher Group in Monroe, Ind., said 2004 was an ``excellent year'' that likely was 50 percent ahead of the group's previous best year. But that means supply is tight.
``(It's) very, very hard to get tires now, so I don't know that this year's going to be as good as last year,'' he said, adding some sizes and radials could be constrained into spring. Otherwise, he said Zurcher's farming customers are upbeat about the future and seem willing to spend money.
Mr. Bauer agreed that supply has been tight, especially in certain sizes, but he doesn't expect that to stunt 2005's growth.
Officials at Goodyear, CGS and Firestone all agreed that supply became a challenge last year. Mr. Rayson said that CGS is now at capacity worldwide, and Mr. Wilson at Firestone said the demand has been extremely high. ``This has been unprecedented demand that any tire manufacturer has not been able to supply totally,'' he said.
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Running like a Deere
* Deere & Co. expects its equipment sales in 2005 to grow 2-7 percent.
* First quarter sales are forecast to outpace the same '04 period by 20-25 percent.