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February 07, 2012 01:00 AM

Plowing up profits: Farm segment surged in 2011; expected to slow through '14

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    AKRON (Feb. 7, 2012) — Growth in the North American farming segment surged to record levels in 2011, with both net farm income and net cash income expected to exceed $100 billion for the first time in history, according to the U.S. Department of Agriculture's (USDA) most recent ag industry forecast.

    Early predictions from the USDA show net farm income to have reached $100.9 billion last year, a 28-percent increase from roughly $88 billion in 2010. Meanwhile, net cash income is forecast to grow 18.9 percent to $109.8 billion. That's up $17.5 billion from 2010 figures and $34.2 billion more than the 10-year average of $75.6 billion.

    Net value added—the third major measure of farm sector earnings—is expected to increase by nearly $23.9 billion in 2011 to $153.7 billion. The inflation-adjusted forecasts of net value added to the U.S. economy and net cash income are the highest values recorded since 1974, the USDA said.

    Strong equipment sales

    For manufacturers of agricultural equipment, these numbers translate into the likelihood for continuing strong equipment sales over the next year.

    According to the Association of Equipment Manufacturers' (AEM) most recent annual business outlook survey, respondents predicted the U.S. agricultural machinery business would grow about 6.4 percent in 2011 over the previous year, while business in Canada will increase about 7.6 percent. Growth of export sales for the year was forecasted at 6.9 percent.

    “Agricultural equipment manufacturers overall fared very well in an otherwise struggling economy,” said Charlie O'Brien, AEM agriculture sector vice president. “Recent growth has been positive in most categories, and exports to emerging countries are rebounding. Strong commodity demand and prices have translated into equipment sales.”

    Respondents to AEM's survey were asked to rank how several factors would influence sales. High commodity prices, interest rates and increased export demand were cited as key positive factors.

    Though the farm market is expected to remain strong, results of the AEM survey show growth in the ag market will taper off from 2012 through 2014. Survey respondents predicted the U.S. agricultural machinery business will grow about 4.9 percent in 2012 then drop to 2.9 percent in 2013 and 2.8 percent in 2014.

    Canadian business is expected to follow a similar pattern, with anticipated growth of 4.8 percent, 2.2 percent and 1.7 during the same period.

    Reversing a trend of the last few years, survey respondents said they expect U.S. and Canada sales of self-propelled combines and 4-wheel-drive tractors to decline slightly over the next few years, while sales of 2-wheel-drive tractors less than 100 horsepower are expected to grow at an increasing rate through 2014.

    In addition, the USDA noted the rates of increase in both net farm income and net cash income show slight decreases from the previous year. Despite these reports from the USDA and AEM, tire manufacturers and dealers alike said they don't see the demand for farm tires dwindling anytime soon.

    “We think it's gonna trend up,” said Maurice Taylor Jr., chairman and CEO of Titan International Inc. “We've put the added capacity into it (farm tires), so we look at this next year as a year that we'll be able to get more product to (dealers).”

    Tom Rodgers, director of sales and marketing for Bridgestone Americas' Agricultural Tire, U.S. & Canada Commercial Tire Sales Division, said that while the ag industry is cyclical, the long-term trend has still been “pointed upward on the graph.”

    “My anticipation is it may be to the point where we could be leveling off, but as long as corn is in the $5 to $6 range and beans are well over $10 (per bushel), I think the strength is probably there in the equipment business and the ag business in general,” he said.

    “…I think our expectation—and maybe what AEM is feeling and maybe sometimes all of us are—after three and four really good years, you're thinking it can't get any better. This thing has got to slow a little bit.

    “Historically, ag has definitely had its share of cycles and sometimes they swing pretty hard.”

    If the market is beginning to slow, Mr. Rodgers said he hasn't noticed. In order to meet stronger demand for its ag tires, Bridgestone has been investing more than $100 million into expanding and upgrading its Des Moines, Iowa, farm tire facility.

    “The demand that we have for our product has definitely exceeded our ability to supply,” Mr. Rodgers told Tire Business. “That's for OE, for the replacement, and that's a general statement. Obviously some rates are better depending on the product.

    “…Our fill rates are improving with our capacity added and our ability to manage the cycles of the market, but I'm sure the OEs will tell you—and the replacement guys, too—it's not where it should be.”

    Mr. Rodgers said the problem is a function of “increasing demand as much as it is our ability to supply.” He admitted the situation isn't likely to improve in 2012 but noted the excessive demand has left the door open—especially in relation to smaller sizes and niche products—to other manufacturers to fill the void left by industry leaders.

    Brian Jones, vice president of marketing for Ken Jones Tire in Worchester, Mass., said farm tire sales for his company have improved about 15 percent over 2010, but getting tires has often been difficult.

    “When supply in the aftermarket gets tight because a lot of the product is going toward original equipment, that's good,” Mr. Jones said. “That means the John Deeres of the world are doing well.”

    For his dealership, the answer has been to stock tires from a variety of manufacturers.

    “(It) causes us to have to bring in more brands, which we do and that's good because if you're in this type of market, you can't settle for being a Titan dealer or a Firestone dealer. You have to carry probably two or three major brands and one or two private label or import brands,” he said.

    Ken Jones Tire carries Titan-, Goodyear-, Firestone-, BKT-, Mitas- and Carlisle-brand farm tires.

    For other dealers, such as Fairfield, Calif.-based wholesaler East Bay Tire Co., the short supply has been a positive.

    “As a wholesaler and a big dealer who can afford to buy and stock tires, you want a short supply because that gets you in the middle,” said East Bay Tire CEO George Pehanick. “When you consider the United States has been in a recession, truck tires have been short the last two years. We're able to get supply because we're a big commercial dealer, and we know (the manufacturers) are gonna take care of their commercial dealers. So it allows your margins to hold or be a little better than they normally are if there's surplus of supply.”

    To illustrate his point, Mr. Pehanick noted both the company's sales and profits hit record numbers in 2011, though he didn't disclose the company's revenues for the year. Farm tire sales make up about 20 percent of East Bay's business, he said.

    Mr. Pehanick said every indication is pointing toward 2012 being “crazy with demand for OEM, and if OEM is going the way it is, it causes the replacement market to be short of supply.”

    Even the company's own Dawg Pound industrial tire brand, manufactured by Alliance Tire Group and Solideal International S.A., has been difficult to obtain. “We can't get enough production out of Alliance (and Solideal) for everything that we're ordering,” Mr. Pehanick said.

    Sizing up the sizes

    While the performance of the U.S. ag industry in general can be difficult to predict from year-to-year, Messrs. Rodgers and Taylor said one thing that will certainly continuing growing is the size of farm tires.

    “I think that farming is here for a long, long term, but I think eventually they're going to have to also change. You're going to see different things,” Mr. Taylor said.

    “You're gonna see much taller tires, you're gonna see narrower tires, you're gonna see—instead of just singles or duals—you're gonna see more triples and the possibility of quads. Then you've got the situation of just gigantic flotation tires that will carry the grain carts and all the other stuff through the fields.”

    Mr. Rodgers said much of Bridgestone's investment at its Des Moines plant is to meet the demand for these larger tires.

    “That's the dynamic in the ag side that's definitely different than a lot of other tire segments within Bridgestone…. They're not changing the ODs (outer diameters) and the envelopes of their tires,” he said. “Probably every 10 years we go up another four to five inches in an OD because the combines and tractors are getting bigger and bigger.

    “They're getting heavier, you need more tire to carry the load or you need a lot more tire to run a low inflation pressure and get better traction and less compaction. That whole matrix just drives bigger tires on us.”

    To reach this reporter: [email protected]; 330-865-6148.

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    Do you have an opinion about this story? Do you have some thoughts you'd like to share with our readers? Tire Business would love to hear from you. Email your letter to Editor Don Detore at [email protected].

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