As a general rule of thumb, the farm machinery industry believes that for every tractor sold, twice the value in other equipment also passes through the dealers gate.
Registration figures for tractors are therefore, an important indicator of the health of this sector, of the agricultural supply industry and, by extension, farming generally.
This is doubly so, because machinery purchase depends more upon the availability of funds rather than the retail price. If it is selling then that is because money is more readily available to buy it.
Irish tractor sales
Bearing this in mind, the registration figures for Ireland during 2021 would suggest that farming is doing rather well at the moment. August registration figures supplied by the Farm Tractor and Machinery Trade Association (FTMTA) tell us that sales were up 55% on 2020, which, in turn, were up 6% on 2019.
So far this year there has been a total of 2,084 tractors registered, 174 more than the total for 2020 with four months still to go – although the autumn is always quieter with the next season, and shiny 22 plates, not so far off.
It is not just Ireland, all the major global manufacturers have reported very strong performances for the year to date. One of the strongest performers is CNHI (Case New Holland Industrial) which enjoyed second quarter sales of $8,490m, 65% up on last year.
This is despite the industry, like every other, suffering supply problems with components and raw materials. It is perhaps because of the perceived shortage of machines that price realisation remained strong – companies are getting what they ask for.
Gathering storm clouds
For just how long the good times can last is the question on everybody’s mind. There are two underlying concerns. The first is the snowballing cost of materials and components, while the second is the confidence of farmers in their business over the next few years.
The primary material for all machines is steel and it is this commodity which has seen some of the steepest rises over the last two years.
In May 2021, the world price of hot rolled coil steel reached $930 a tonne, this was up from its lowest point of $540 in February last year. Since then it has fallen back; it traded at around $700 in July, but is now heading upwards again and has returned to around $925 this week.
Tractor prices at mercy of markets
Other than the increase in price, another marked characteristic of this year’s trading is volatility. Prices have ranged from $620 to $930 a tonne, a change which occurred in just three months
There are plenty of scary stories about escalating prices doing the rounds presently, yet it must be remembered that prices are always moving and the industry survived the last peak in 2018, when the price reached €700.
There are three main causes cited for these fluctuations.
The first is that the drop in demand last year wasn’t as dramatic as expected. Many mills were closed down in anticipation of the steel not being needed and they have yet to return to use.
The second is that China has embarked on a capital infrastructure spending spree and is absorbing large quantities for domestic use.
The third is the strength of the US dollar. Steel is traded on the global market in the Chinese currency yuan. Thus, any movement between the dollar and yuan will affect the price in western markets, which tend to operate in dollars.
Given these ever changing parameters it is little wonder that manufacturers are burning a good deal of midnight oil in trying to put together price lists for 2022.
The message that is emerging from the trade is that there will certainly be an increase in price for farm equipment next year. Somewhat unsurprisingly, dealers and importers are suggesting that the best way to mitigate the rise is to order machinery early, so a price can be firmly nailed down.
Farm incomes
There is little doubt that farmers are presently benefiting from firmer food commodity prices. Wheat is well on its way to recovering its record highs of nearly a decade ago and milk remains steady, in the mid-thirty c/L range.
On paper, this gives the average dairy farmer with 90 cows a gross income of €160,000 per annum. Yet, there are plenty of herds approaching 200 head which would at least double that figure to €300,000+.
Over half the tractors sold in Ireland lie in the 100hp to 140hp power band, where they typically cost €85,000 apiece. Buying one new, over a five year period, will take just €17,000 from that income.
Admittedly, these are very crude figures, but they do suggest that the money is there to invest in new machinery, as well as all the infrastructure that modern farms rely on.
Again, this would appear to be a global effect, for the Federal reserve Bank of Chicago has reported that demand for farm loans, to cover all aspects of a farm enterprise, has just reached a 35 year low.
However, it also reports that credit extended to farmers by other sources, such as merchants and dealers, increased, although it was not able to put a figure on this.
The case for buying in 2022
Talk in the trade suggests that most dealers are happy with the 2021 season and are quietly expecting sales to continue at a healthy level next year. If farm gate prices remain steady then this might not be an unreasonable assumption.
The big unknown is the price of the machinery on offer. Steel is undergoing a great deal of fluctuation in price and has exceeded many forecasts given over the year, yet it is still within a known range.
Thankfully, machines are not all about steel. Yet other components, such as electronic chips, have risen sharply due to strong demand. Transport costs, especially container shipping rates, have also headed sharply north.
Rubber however, has actually decreased in price, and was trading at $1.87/kg in July, down from $2.37 in February, partially offsetting price rises elsewhere.
Being within the euro zone, Ireland does not need to worry about exchange rate fluctuations for a large proportion of its machinery, yet anything from the UK or America will be subject to these vagaries.
There are a lot of often conflicting factors to take into account when considering updating machinery, yet there also some certainties.
The first is that the manufacturers and importers also seek price stability and work towards reducing sudden shocks in pricing – it makes life easier for them as well.
The second is that machine design does not stand still, new developments are always bringing greater efficiency to farming operations; these cannot be taken advantage of without investing in new equipment.
If the money is available to upgrade and improve machinery then the opportunity to do so should not be passed over lightly. Farming is cyclic, it would be unfortunate to be still working with older machinery if food commodity prices took another tumble.