AKRONUnless someone's been plowing the back 40, lost in thought for over a year, they're likely well aware that the North American ag market has seen better days.
Farm sector profitability plummeted in 2015 for the second straight yearand with that, the tire industry hasn't escaped the impact.
According to the U.S. Department of Agriculture (USDA), net cash farm income for 2015 was expected to top out at $93 billion, a 28-percent plunge from 2014 levels. In addition, 2015 net farm income is forecast to reach only $55.9 billion, down 38 percent from 2014's estimate of $90.4 billion.
If realized, the USDA said, it would mark the lowest net farm income since 2002 and a 55-percent drop from 2013's high of $123.3 billion.
So far, the trend hasn't shown signs of letting up.
Creighton University reported its farmland and ranchland price index compiled for January sank to 23.9, down from 28.8 in December.
This is the 26th straight month the index has moved below growth neutral, said Ernie Goss, Jack A. MacAllister Chair in Regional Economics, Creigh-ton University's Hei-der College of Business.
But, as in previous months, there is a great deal of variation across the region in the direction and magnitude of farmland prices with prices growing in some portions of the region.
Ag equipment sales continue to be impacted as a result of poor commodity prices. Creighton's farm equipment-sales index sank to a record low of 7 in January, down from the previous record low of 8.8 set last month.
The strengthening U.S. dollar and global economic weakness have pushed grain prices down by 8 percent and slaughter cattle prices 28-percent lower over the past 12 months, Mr. Goss said.
These weaker prices have discouraged farmers from buying additional agriculture equipment, he said, and have negatively affected the agriculture equipment dealers and manufacturers in the region.
Ag equipment manufacturersand, as a result, their tire supplierssaw sales slip last year as farmers were more frugal with their spending.
Moving forward into 2016, the outlook is bleak at best for the OE market on new equipment, said Scott Sloan, agricultural products manager for Titan International Inc. There may be some upticks in some areas, but for the most part the market will remain down.
And as with any OE supplier, when your wagon is hitched to theirs, it is obviously going to move in the same direction.
Tom Rodgers, director of sales for Bridgestone Americas' Firestone Farm Tires segment, said a second year of declining net farm income has had a significant effect on farmers' capital purchases, and the reduction in equipment sales has impacted its OE business dramatically.
Given the current agricultural economic conditions and continued depressed commodity prices, we do not expect to see market growth in 2016, he said.
In turn, we will focus on expanding our solutions approach, providing the market both tire and rubber tracks options to improve on farm efficiency and reduce (soil) compaction to help farmers' bottom line.
U.S. ag equipment sales were down across the board in 2015, according to the Association of Equipment Manufacturer's December 2015 Flash Report. Four-wheel-drive tractor sales declined 39 percent from the year prior, while self-propelled combine sales plummeted 32.5 percent for the period.
Sales of two-wheel drive farm equipment declined 0.6 percent, largely because demand for tractors under 40 horsepower grew 8 percent.
By contrast, sales of 100-plus-horsepower, two-wheel-drive tractors declined 25.5 percent for the period.
Equipment sales in Canada showed a similar drop, with two-wheel- and four-wheel-drive tractors and self-propelled combines falling 13.3, 28.4 and 13.9 percent, respectively.
Implement dealers are sitting on high inventories of both new and used equipment, Mr. Sloan said. Their priority is to move those before bringing new equipment on the lot.
This does not bode well for new equipment manufacturers looking to sell these dealers new equipment off the line from the factory.
What's bad for farmers and implement dealers isn't always bad for ag tire dealers.
The good news is that if [farmers] aren't buying new equipment, they are looking at investing into their existing equipment, which would include tires, Mr. Sloan told Tire Business. We have and will see the aftermarket volumes trend continue to increase from the last part of last year into the upcoming year. We have seen our aftermarket grow in the last half of 2015, and the beginning of 2016 is looking very promising.
Mr. Sloan noted that large/medium-sized radial tractor tires have been at the top of the list in terms of segments that have performed well through the ag market's downturn.
On the other end of the spectrum, smaller bias sizes did not perform as well.
The market is saturated with inventories of not only domestic but of numerous offshore tire manufacturers, he said. Large inventory with stunted demand tends to turn into a bloodbath when it comes to pricing and profits.
Brian Hubbard, owner of Aledo, Texas-based ag tire importer Route 66 Tire and Rubber L.L.C., agreed, noting that farmers are spending more on tires this year than equipment, which is a plus for the aftermarket.
The northwest irrigation sales are already heating up due to last year's drought, he said. I think it will be a better year for aftermarket sales due to profits being slimmer than ever, and new equipment is just not affordable with low margins.
Craig Crystal, owner of Jim's Tire Service Inc. in Sedalia, Mo., said ag tire sales at his dealership remained steady through 2015.
We expected to go down and really it hasn't, he said. It's a little slower, but it's still going pretty well.
However, he said he thinks the ag tire aftermarket will be soft heading into 2016, at least in his area.
Cattle took a dip, and with commodity pricesI get that there's not going to be as much equipment sold, and they think (farmers) will back into tires, but in this area I just don't see it rising because of that, he said. (Farmers) tend to buy only as needed, so I don't think it will be as strong.
Mr. Crystal said one challenge is that, in a way, farmers have been getting new tires without having to purchase them.
If they traded a tractor off, the (implement) dealer was buying a set of tires to put on it just to resell it, he said.
Another issue is that other farming-related costs have been dropping.
People we're talking to, yeah, they're calling about tires, but chemicals (prices) are dropping, seeds are dropping, fertilizer, so it seems like they're kind of waiting for us to drop too, he said. ...I think some of it's just waiting. Fuel prices are low, and that's part of the reason we were told (farmers) everything was getting higher. Now I think they expect (tire prices) to go down.
While equipment sales have had a rough go in the past two years, there are some positives.
We anticipate that 2016 will look much like 2015 in overall tire market conditions, said Bruce Besancon, vice president of marketing for Alliance Tire Americas Inc.
The OEMswhile struggling with the large-horsepower equipmenthave been steady in producing small tractors. Hopes are that with the bonus depreciation on new equipment purchased in 2016 and a permanent $500,000 deduction on new and used equipmentwhich is allowed by Section 179, signed into law in late December 2015some of the larger farm machines will start moving again.
According to Mr. Besancon, most farmers were under the impression through 2015 that they would be able to deduct only $25,000 of business expenses before Congress made permanent provisions for $500,000 in deductions. This likely impacted their spending habits last year.
In addition, record droughts in the western region of North America and late planting due to a harsh winter in other areas compounded the impact of already low commodity prices.
As we head into 2016, everyone will have one eye on the weather and the other on their finances, Mr. Besancon said. Everyone will want to see if Section 179 re-stimulates that OE market and, of course, will be watching to see if farm income starts to recover.
But beyond this, the American farmer is continuing in his search for optimization, he continued. As more and more automation comes to the field, the farmer is going to expect innovation across the board.
Innovation, he added, is no longer just about new engine features, implement design or new electronics. The farmer wants to know how his machinery works, how lower ground pressures can protect his yield and how his tires can help him operate more efficiently on the road and off. These will become the questions that a professional farmer will ask of his tire provider.
Mr. Besancon noted that farmers are looking for ways to boost productivity and life from their machines.
With some of our more unique tires, such as high-speed flotation tires that can travel on roads up to 65 mph and IF/VF tires that minimize soil impact, we have the products that farmers need for their operations, he said. We are also seeing a lot of opportunity in the market for tires for self-propelled sprayers.
According to Mr. Sloan, one major positive of a down cycle is that it allows equipment makers time to look at and evaluate new types of technology.
When things are running so hard to just get product out the door, there is little interest in making changes. Now in a slower period, it gives them time to evaluate new technologies like our LSW (low sidewall tire), he said.
According to Titan's website, its LSW tire/wheel assemblies feature a larger rim diameter and lower profile sidewall than comparable tires, but feature the same overall diameter, inflation pressure and weight load capacity. Titan claims the technology provides great stability for increasingly large ag equipment.
Furthermore, market conditions aren't exactly at their worst, according to Eric MacPherson, CEO of Dawson Tire & Wheel.
Where we are at today in a gray market is still better than where we were at in 2009, he said. Yes, there's some realigning of equity positions within the agricultural industry, but the guys that had it figured out (then) still have it figured out, whether they're the ag dealer or the farmer, the grower.
Corn is still better than where it was in 2009, and there's still more net farm income projected in 2016 than there was in 2009. It's just the realignment of expectations, because $7 corn probably wasn't the best thing that happened to the ag industry. It was fun, though.
Mr. MacPherson added that while most people expect the farm market to be flat to down in 2016, the farm balance sheet is in the best position it has been in since the early '70s.
Anybody who talks about agriculture tells us that the farmer is in the best position he's ever been to weather this cyclefar better than the '80sand it's still the second biggest industry in America, he said.
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