One of the world’s largest agricultural lenders suggests North American farm equipment dealers “transform” to improve returns on invested capital.
In a food and agribusiness research and advisory missive, Rabobank’s senior analyst for farm inputs, Kenneth Zuckerberg, says the equipment sector is being rocked by three years of declining sales, along with shrinking net income and a weak intermediate-term demand outlook.
In fact, Rabobank does not forecast any meaningful new equipment purchase activity until early 2019, based on its expectation that U.S. farmers’ income will fall for a third consecutive year in 2016, and that corn prices are not likely to top USD $4/bushel for the next five years.
Leading players have taken what Zuckerberg calls a defensive response with temporary benefits.
At the manufacturing level, they’ve reduced production, cut costs, and made strategic acquisitions, such as ACGO’s purchase of Cimbria in June.
And at the dealership level, manufacturers have reduced inventory levels, consolidated stores and are emphasizing ancillary services, such as parts, repair services and equipment rentals.
Zuckerberg says consolidation remains a viable option to improve profitability, a suggestion that will no doubt irk farmers who already think they travel too far to get to a dealership.
But consolidation can’t go on forever, even with low commodity process and negative farmer cash flows. A different approach is needed beyond wait-and-see. “Given the sector dynamics, stagnation is a risky strategy, especially as farmers are increasingly becoming cost-conscious,” he says.
Zuckerberg’s main suggestions include product extension to capitalize on the next phase of technology and mechanization coming to North American farms – potentially, technologies related to precision agriculture.
That, he says, will entail partnering with specialized companies that are likely smaller and may not have been top of mind with equipment dealers previously.
But such partnerships also stand to be seen by farmers as a value-added benefit of visiting an established equipment dealer and having access to an array of new, associated products.
He points to five options for dealers to consider:
1. Field equipment lasts longer these days, so add even greater parts and service capacity to your operation. It leverages the capabilities of mechanical staff already on staff.
2. Sell small and medium-sized equipment geared to sectors other than row cropping, as well as industrial equipment (skid steers, wheel loaders, etc.) and consumer products such as lawnmowers.
3. Sell and service emerging high-tech equipment such as drones, robots, and autonomous tractors.
4. Provide fee-based agronomic services.
5. Cross-sell data and precision farming services.
Says Zuckerberg: “There are opportunities for forward-thinking dealership groups, but courage and conviction will be key during the current period of financial stress and farmer anxiety.”