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Consolidation on farms, in machinery

There are 2.2 million commercial farms in the U.S., each producing crops or livestock valued at a minimum of $250,000.

However, farms with incomes of more than $1 million account for more than 60 percent of the total farm gate share today. Farms in that category total only about 57,000, the seating capacity of Dodger Stadium in Los Angeles, according to George Russell, executive partner of Currie Management Consultants, which specializes in working with machinery manufacturers and dealers.

Just three decades ago $1 million farms represented 23 percent of total farm sales. Russell told the Italian Farm Machinery Convention in Laguna Niguel, Calif., that this consolidation is being driven by growing global demand and competition for agricultural products.

This demand is reflected in the $300 billion growth in world agricultural exports from 2001 to 2006 — the latest statistics available.

This huge, growing global market is offering opportunities for U.S. farmers, but they must compete by increasing productivity or scale or both.

“Farmers who have been through past (economic) cycles are very good business people. For the most part they run family farms and understand how to invest in a business to make money,” he explained.

They are looking for new technology to remain in business and that is where small equipment manufacturers play an important role.

“You are the innovators. Forty percent of all innovation in the industry comes from small manufacturers and 40 percent from farmers. Only 20 percent comes from the large manufacturers,” he said.

Even though U.S. farm income is expected to drop 33 percent this year from last season, Russell says farmers have capital to invest. The debt-to-equity ratio for U.S. farmers is the narrowest it has been in decades, according to Russell.

“There is a lot of buying power in the hands of U.S. farmers right now. Whether they will buy is another question — due to the uncertainty in the economy. The capacity to capitalize is there,” he remarked.

When farmers spend money, Russell says, they will be looking at technology such as:

• Electronics to provide more information and control.

• Precision farming/GPS to provide more information and efficiency.

• CVT and electro-hydraulics for precision power transmission.

• Specialized equipment for higher speeds and productivity.

• More integration of machines, seeds, chemicals and environmental safety.

Farm consolidation is being duplicated in the farm machinery business, as evidenced by equipment dealer consolidation with 156 owner groups owning five or more North American equipment stores.

The number of farm equipment stores in North America has declined by 14 percent since 1997 and now totals 6,200. AGCO has the largest number of authorized brands totaling 1,700; followed by Deere with 1,567; New Holland, 1,100; Kubota, 1,000 and Case IH, 950. Others total 525.

North America is one of the most attractive farm machinery markets in the world and that draws international tractor manufacturers. Russell identified 16 new lines entering the U.S. recently from six different countries.

The consolidation and competition is making it more challenging for short-line manufacturers, such as the Italian farm machinery manufacturers, to distribute products in the U.S.

Fewer dealers means it is more difficult to land a dealer to handle short-line equipment. Changes in technology, like the Internet, are creating more competition for machines and information.

Dealers are more demanding, operating with lower inventories. Dealers are depending more on manufacturers and wholesalers to inventory products because of interest rates and economic uncertainty.

One of the biggest issues facing the farm equipment industry is “purity.” This is where major manufacturers are demanding that their licensed dealers practice brand “purity” by not carrying brands manufactured by other companies.

This is causing considerable tension, according to Russell, between dealers and manufacturers and prompting dealers to seek legislation to prevent manufacturers from punishing dealers for carrying non-dealership brands.

The purity issue was the key element in the talk given by Herman Wilson, who owns 14 equipment dealerships in three states (California, Idaho and Texas). His Pioneer Equipment stores carry all the major brands, except Deere.

“It (purity) does not make any sense,” the controversial Wilson stated, who also called for a major overall of the farm equipment business in the U.S.

Two years ago 80 percent to 90 percent of his dealerships’ business was in high horsepower tractors. Smaller tractors dominate the business today, due to the shift from large acreage row crops such as cotton to permanent crops like orchards and vineyards. The growth in the hobby/rural lifestyle also is spurring small tractor sales.

In the 1990s, Case IH, a key brand in his dealerships, said it was discontinuing the manufacture of small tractors.

He claims two-thirds of the Case IH dealers he is acquainted with now carry Kubota tractors to meet customer demand.

Major manufacturers “claim value of dealership is the name on the post out front. We know that is not the case.” Major manufacturers have “tried to run” dealerships, and they have not been successful.

It is forcing dealers to seek legal protection or purity will “absolutely destroy dealerships.” Manufacturers’ margins are economically challenging dealerships. Wilson claims companies want 15 percent to 20 percent margins for equipment delivered to dealerships. Wilson says he needs another 18 percent to 20 percent to be profitable.

“Those numbers need to be slashed. Dealers cannot afford to let huge inventories pile up. You cannot run the equipment business like they did in 1934.”

Wilson’s frank assessment of the farm equipment business admittedly drew disagreement from his audience.

Several years ago, he purchased Western Farm Service’s 72 retail agchem/fertilizer retail outlets, mostly in the West. Sales grew 50 percent in five years with no acquisitions. It grew, he said, because the business model changed.

“This (farm equipment) industry has too much structural cost in it for what we are doing for our customers,” he says.

For example, Wilson said very few tractor parts are manufactured by the branded company, yet companies continue to charge as if they were manufactured by the company. This is prompting dealers to get parts directly from manufacturers and circumventing the majors.

In addition dealers are required to carry too many parts, he said. “You don’t need five different alternators for five different tractors.”


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