AKRON—It's a rough year to be a farmer—and by association a farm tire dealer—as falling commodity prices have negatively impacted the spending ability of crop growers in 2014.
The U.S. Department of Agriculture (USDA) has forecasted net farm income to fall to $113.2 billion this year from $131.3 billion in 2013, a decline of 13.8 percent. If realized, the USDA said it would mark the lowest income level since 2010, though it would remain about the previous 10-year annual average.
Crop receipts are expected to decline by about $15.2 billion this year, led by an anticipated $12.8-billion decrease in corn receipts. With the USDA's prediction of record-level corn production in 2014, the annual price of corn is expected to fall by about 32.4 percent.
According to Tire Business' sister publication Crain's Chicago Business, corn prices have plummeted below $3.50 a bushel—down from upwards of $7 only a few years ago—marking the first time in nearly a decade the price has dipped below the average cost of production. In addition, the USDA is forecasting annual price declines for soybeans, wheat, peanuts and many other crops.
But high crop yields aren't the only factor. Drought conditions in California created other problems for farmers in that area of the country, while a change in the federal tax code in 2014 has severely reduced the maximum deduction for farm equipment purchases, knocking it down to $25,000 from $500,000. The change has made it more difficult for farmers to upgrade equipment, when a single tractor can set them back hundreds of thousands of dollars.
Carl Casalbore, president of BKT USA Inc., a supplier of tires for agricultural machinery, said 2014 has been a “perfect storm” of issues affecting the farm segment.
“We know competition is tough and we know (tire) prices are coming down and the weather isn't really helping,” he said. “California had droughts, you have floods down south and you have the crops that are delayed up north due to the weather for harvesting. It's all over the place.”
What all of this adds up to is a decline in demand for farm equipment and, as a byproduct, farm tires.
“Two or three years ago there was more demand than there was supply. Now it's a little different,” Mr. Casalbore told Tire Business. “There's more supply than there is demand, not only on the OE end, but also to a certain degree that overflow of supply from OE is falling into the replacement end because where else is it going to go?”
Don Nebelsick, owner of Don's Tire & Supply Inc. in Abilene, Kan., said his ag tire business has been off by 20 percent this year compared with 2013.
“Since 2008 until the beginning of this year—or maybe halfway through last year—demand outweighed the production, and now the production is outweighing the demand,” he told Tire Business. “The replacement units have slowed down and original equipment has slowed down substantially.”
And when demand goes down, so do prices.
Mr. Nebelsick said ag unit sales have dipped by about 5 percent this year, but ag tire prices have “dropped substantially” since July 1.
“It's always hard in the retail and wholesale industry when prices go down,” he said. “Trying to get the manufacturers to understand they need to price protect has been an issue.”
Pat Billingsley, co-owner of Billingsley Tire Inc. in Le-moore, Calif., said his ag business also has been off by about 20 percent this year, though he attributes most of that to the state's ongoing drought crisis.
“That's affected me quite a bit, but it's affected all tire dealers,” he said. Whether or not the problem persists depends entirely on if the area gets rain, he added.
“If we don't get any rain, it'll go down another 20 percent,” he said. “If we get rain, it might go back to even, maybe. It's so desolate it's hard to say.”
According to Mr. Billingsley, another issue is that many of the farmers in his area—approximately 80 percent of his accounts—have been turning to rental equipment as an alternative to buying it.
“A lot of these farmers now are going to rental companies and using their services, and they tell me the reason for this is that when you rent something you can write it off 100 percent,” he said. “And the rental company pays for everything. They don't pay for fuel or tire damage, but they pay for everything else.
“You wear out the tire and the rental company will buy a new tire.”
Figures from the Association of Equipment Manufacturers (AEM) appear to corroborate a down market.
According to the AEM's August 2014 Flash Report, U.S. sales of four-wheel-drive farm tractors and self-propelled combines plummeted 37.4 percent and 28.7 percent, respectively, during the month compared with August 2013.
Year-to-date sales through August also are off, with sales of four-wheel-drive tractors and self-propelled combines falling 14.3 percent and 17.3 percent, respectively, compared with the same period in 2013.
The Canadian market looks similar, according to AEM data. Through August, sales of four-wheel-drive farm tractors have dropped by 24 percent, while combine sales have declined by 25.2 percent.
The small tractor market has faired somewhat better, with moderate year-to-date growth in sales of two-wheel-drive tractors under 100 horsepower in both the U.S. and Canada. Total sales of two-wheel-drive farm tractors increased for the period by 3.3 percent in the U.S. and 0.7 percent in Canada.
In an August investor presentation, farm equipment manufacturer Deere & Co. reported its equipment sales declined to $9.5 billion in the third quarter of 2014 compared with $10.01 billion for the same period last year. Its net income dropped 15 percent to $850.7 million from $996.5 million during the same time frame.
Deere forecasted that retail ag equipment sales would be down by 10 percent for the year—a somewhat less favorable outlook than its earlier prediction of 5-10 percent.
Ag tire makers have experienced similar woes, especially on the OE end.
Titan International Inc. fell $24.9 million into the red in the quarter ended June 30 on 11.7-percent lower sales, dragging down the firm's six-month results as well, to a loss of $18.3 million.
Titan's sales for the first half of 2014 were down 13 percent as the result of price/mix reductions, driven primarily from decreased demand for its mining and larger agricultural products.
Mr. Casalbore said BKT's results have been more favorable. The firm has a small amount of OE business in the U.S. but its products are geared primarily toward the aftermarket. Both areas of business have been stable for the company.
“The good point is that we do believe that the business is either stable or growing,” he said. “It may be down a little bit, but it's difficult to get your pulse on it.... We know that the market is there, obviously. It's a little bit up, it's a little bit down, and our business is fairly good vs. last year.
“It's good for us, but we don't really know if the market is up 20 percent or 40 percent, or down 10 percent. Everything is speculation.”
To reach this reporter: [email protected]; 330-865-6148.