Navigating New Normals: Market Insights from Scott Steffes
November 2023
I think it’s safe to say we’ll no longer be making new daily highs in the markets as we have for the last several years. (As an example, in 2017 our data shows the average price of a John Deere S Series Combine was $162,000 compared to an average of $193,000, which is an increase of 20% even though the fleet is aging). We’ve been in unprecedented times, and we have for what will likely be the longest time in at least this generation. We’re all blessed to be a part of it. That’s not to say we’re headed to some deep, dark place, or everything is downhill from here. Rather, perhaps we’re returning to “normal”? What does that mean anyway? Normal is different for everyone and different from a market segment perspective, geography, demographics, and a whole bunch more. Let’s talk about a few areas and perhaps we can explain where we’re at and where we think we’re headed in a couple of areas we operate in, specifically, ag, construction, and farm real estate.
Farm Equipment
For the first time in several years, we’re starting to see inventory catching up to demand on dealer lots where, historically, the bulk of used farm machinery is located. This trickles down to auctions and ultimately to the operator. Late-model farm machinery is staying steady, but the highs are definitely in, with perhaps a slight retraction from the tops of last fall and spring. For the first time in probably 4 years, we’re seeing a “choosier” market where in the past a buyer might have had to look the other way on some quality or age just to acquire some capacity. Instead of finding “just one,” there can be options and alternatives out there and a return of some price fluctuations when it comes to seasonal items you should be prepared to take advantage of. Typically, you would see swings in demand in the off-season compared to the season of use which disappeared but is now returning. We saw it this summer on some planter sales, tillage, and big horsepower tractor sales. I suspect high demand will return in this fall market, which has always been a great time to sell. If there is one thing that’s changed since my dad started our business and a spring auction was the first choice is the fact the post-harvest market has been the most robust with the greatest activity, the biggest supply, and the most consistent pricing. If you asked me why, I’d point you to two factors. First and likely most important is the section 179 tax deduction. That changed everything from the farmer’s perspective, who has always been very shrewd and tax-averse. The second goes hand in hand with the shrewd operator mentality and the idea that plans are in place and thinking about what’s next happens far quicker in today’s competitive environment. Participating in the fall markets also plays into the “buy first, then sell” strategy for operators who are not afraid to do their own trading. This is the single greatest advice I can give anyone who is not in the “buy new” camp. From our perspective, we are huge fans of the fall/winter auctions, and I’ll give you just a few reasons why. First, the equipment is fresh, having just come out of the field in most cases. That means no dead batteries, no flat tires, no mice in the cabs from sitting all winter. Second, it’s much easier to deal with frozen ground and maybe some fresh snow than a winter’s worth, frozen shed doors, gelled-up fuel, frozen-down equipment, and the worst...... mud! Keep that in mind when you think about what’s next for your equipment needs.
Don’t expect to see a big fluctuation in values, whether it’s this fall or next spring. Perhaps a slight down but to a level that would be considered more normal and probably healthier from an overall market perspective. We heard buyers many times say, “I can’t believe I had to pay that much!”. They had to because there weren’t any alternatives; they had the cash, and they needed the equipment. Look for more choices in the coming months, but unless new prices come down (who expects that), the current used numbers still make sense. Let’s watch and see.
Construction
Here at the Steffes Group, we’ve grown exponentially in the construction market, with more to come. We’ve always been active, but our geographic footprint, with our added locations, plus the people who have joined us, gives us a tremendous amount of horsepower! Pretty much everything I’ve said above when it comes to farm equipment can also be said about the construction segment as we look forward. They tend to follow each other, with the construction world being quite a bit larger, more segmented, and more fluid, especially when it comes to change. You contractors are much more aware of idle assets and don’t tolerate equipment sitting around. You don’t see contractors with storage sheds like farmers have. If a unit isn’t on a job site, it’s not making money. The contractor is also much more reactive when it comes to equipment needs. If you’re on the selling side, having the discipline to hold an item to get close to the season of use pays. For you buyers, when a good piece of equipment comes up for bid off-season, get your checkbook out, as the seasonal swings are greater in construction. Payloaders, excavators, dozers, and skid steers are all going to hold fairly strong, and even if we have a slowdown, we’re a long way from where we were. The supply still isn’t there, the demand keeps going up, and the pipeline is still not caught up. That can change mostly on the demand side with interest rate pressures, but oil remains strong, and the pipeline for upcoming work, especially on the municipal side, is positive. Look for the high-end specialty items to become even more volatile with large market swings. Potential buyers/users don’t want to take a position on an available piece if there is no work. On the other hand, owners can’t stand the carry on a 6 or 7-figure idle piece with these current interest rates. The contractor with the right mindset with the right financial strength should see that as an opportunity.
Contractors are also discovering the market premiums that can be achieved when bringing equipment to market along with a story and a company brand per se. Service records, added warranties, and caring sellers make for caring buyers. Leveraging information that can be passed on, adding confidence, and distinguishing one item from the next gets attention and returns dollars, especially now when more alternatives are available. Keep that in mind when it comes time to sell.
Farm Real Estate
It’s going to be hard to convince me land values won’t retract, considering the math problem current interest rates are creating. The exception will be the highest quality dirt in the most tightly held markets, which seem to always go up, stay steady, or simply not for sale when there is change. Interest rates have the greatest effect on land values. The buyers have tolerated new highs at nearly every auction in the last few years as there weren’t many alternatives, and “cash wasn’t worth anything.” You see banks everywhere aggressively looking for deposits approaching 5%, which is better than most cash rent returns and higher than the 3% threshold that moves the investors away we’ve talked about for years. Further, buyers aren’t so optimistic about the upside potential on appreciation, especially considering the pace we’ve been on. Now that being said, land has always gone up quickly and corrected slowly, so we see the amount of land available in the market slowing with little seller motivation. The exception here is a life-changing event like a death or perhaps family-held land where dilution is an issue.
As always, when land comes for sale across the road, buying it has been the right decision for farm families. The trick has always been figuring out a way to pay for it, and leveraging with a high debt load has never been the wisest move. That will never change. Returning to a more normal pace and price settling seems to make sense. If you’re a seller, you still will have the benefit of the largest run-up in a generation, and if you’re a buyer, get ready as the aging demographics of farmland owners keep ticking higher.
Again, be certain there seems to be little financial stress even with rising interest rates. Anyone who worries about this being “just like the 80s” is missing the fact we’re nowhere near the debt loads that made that happen... yet. Seven or eight percent interest is a long way from 14-18 percent, and tell me, what bank in the country is willing to collateral lend like they did back then? Farmland has been and always will be one of the best investments anyone could ever make, especially if you’re so inclined to be a farmer. All you have to do is figure out a way to make it work, just like the homesteaders had to when they got land for free.
Scott Steffes
President, Steffes Group, Inc.
