These Strange Times
If you’re an ag equipment dealer in North America, you’re already keenly aware of the extraordinary current market conditions we’re living in. A labor strike at a major manufacturer, inflation, decreasing brand loyalty, chip shortages, supply chain disruptions in parts and whole goods are all important factors affecting every participant in our business. From the farmer to the CEOs of the largest equipment manufacturers, and everyone in between, there’s PLENTY of room for speculation in each of these aspects. But rather than speculate, this piece will present some factual data on used equipment selling prices across the continent and it’s offered here for your consideration as you navigate your business through these peculiar times.
There are some general trends over the last two years marking a consistent rise in the index value of three significant equipment categories. We’ll get into that in a minute, but first, what is the “Index Value?”
What is the Index Value?
There is a technical description below* but generally the index value allows us to see changes in the selling price of a normalized piece of equipment. Wait, what do you mean by “normalized”? Glad you asked! As a professional in the ag equipment business, you know that options and usage on a used machine can make a difference of tens of thousands of dollars in its selling price.
When analyzing overall marketplace trends, ignoring the effect of options and usage on equipment’s sold prices can lead to false conclusions. Normalization and the resulting index value is what helps us account for variations in options and usage to get a clearer picture of genuine trends in the sold values of used ag equipment. If equipment is being sold with less usage hours, it’s natural to expect the selling price to be higher than the same make, model and year of a piece with higher usage. Similarly, if it is sold equipped with every option available, it should command a much higher value than a lesser-equipped “base” model. Regional differences in crop and soil type will also affect used prices.
Let’s look at some portions of an appraisal of a 2020 John Deere 8R 280 to illustrate further.
Note how the low usage hours In RED (only 250) increased the appraised value by $21,164 and all the options in BLUE selected for this tractor added another $68,024 for a total increase to the base appraisal’s cash value of $89,188.
If you were to compare the sold price of a machine like this to the sold price of a base model with above-average engine hours, you could expect to see up to a 50% change in its sold price. Eliminating this variability in the same type, make, model and year of equipment is what “normalizing” does.
The index values you see in the charts first adjust for a machine’s age, usage and seasonality by normalizing thousands of sold reports from dealer and auction sources.
Next, the aggregate value is compiled. Then, the value is compared to the previous month and we can see the change month-to-month as a percentage difference up or down, across broad categories of equipment. In the charts you see here, this is what we call the “Avg Monthly Index” or the index value.
On average, 3,000 sold equipment reports were received per week in 2022. Every report is individually reviewed and analyzed by a team of ag equipment experts. Only reports with completed usage and options are kept. The rest are thrown out.
With this understanding of normalization and what we mean by the index value, let’s look into some trends in some broad categories of used equipment sold prices. In this piece, we’re segmenting in three categories: Combines, Tractors over 100HP, and Tractors under 100HP.
Over the last two years, there has been a significant rise in the index value of these three significant equipment categories.
Most would agree that the steep inclines of these index values over the last one to two years are not sustainable. As dealers negotiate their new allocations and segment their customers, selling and pre-selling used trade-ins has become the new norm. As equipment supply comes back, we’ll likely see these index values come down to lower levels, hopefully gradually and not all at once. Dealers are rightfully cautious to avoid being stuck with inventory when these lofty values come down.
The most recent indication of a potential cooling off came in September 2022. At that time, we were hearing reports from dealers of increased new supply in the small tractors category which likely contributed to the downturn from August highs. Back in the Fall we theorized that the decline in the small tractor category’s index value in September might be a bellwether for what is to come in the other two categories as long-awaited new whole goods orders began trickling in.
After this peak in August and a brief head fake to the upward direction in November, the yellow line, representing the small tractors’ index value, falls back to 63.1%. If we were to throw out the November value, this line would be perfectly flat going back to September.
The availability of new inventory is the catalyst for the trade cycle and used sales that follow. The used trade-in inventory and resulting sales likely contributed to the retractions from these peaks observed in the yellow index value line in the small tractors category.
This pattern of new equipment availability, the resulting trade cycle, and small declines in the index value is one that could be seen across each of the three equipment categories.
By January 2023, flat would become a theme across all three categories. Here in the large tractor category, you can see the green line, although not flat, reveals the slightest increase (0.07 percentage points). This is the slightest increase seen since May 2021, over 20 months ago.
Lastly, we can see a similar flatness in the combines’ index value. After reaching a value of 100% for the first time in September 2022, the composite combine index value, represented by the red line, is near flat from the previous month, moving up by the slightest amount of 0.1 percentage point.
Looking through the history in these index value lines, you can see plenty of ups and downs, temporary peaks and dips, all-time highs and lows, and sometimes years of relative stability. At the time of this writing, January 2023, it would appear that the flatness revealed in Q4 2022 could signal the beginning of a used equipment pricing downturn. However, reporting the true historical data is the objective in these few pages and forward speculation is anyone’s guess.
Data in this analysis comes from the same data source used in the popular IronGuides product, considered the industry standard for used ag equipment valuation. IronMonthly provides customers with this data to slice across makes, equipment types and detail down to the model level. For high level reporting, like the charts shown here, you can subscribe for free to the Iron Solutions Newsletter.
*The Iron Monthly Index is a value that represents the changes in the selling price of an average piece of equipment, after it has been adjusted for Age, Usage and Seasonality. To calculate the average adjusted selling price in a month, we determine what represents an average unit for that given month. We do this by identifying all the reported sales transactions for this type, make, model that are less than 5 years old reported to us in the past 12 months. From this data set we calculate the average age in months. We use Nov. 1 of the (model year – 1) as the born-on date for the calculation of age. Ex. if the unit is identified as a 2015 model, it was born on Nov. 1, 2014. Once the average age is calculated, we determine what the expected usage is for that age. The usage is the average usage that we publish in the Iron Guide for a unit of that age. Usage is typically measured in Engine Hours but for Combines it represents Separator hours. For each sold report identified, we adjust the reported sold price so that it is representative of the average unit sold in the current month. Our proprietary predictive model tells us how much we need to adjust the reported sold value for each hour difference from the average usage as well as for each month of age if this unit differs from the average age. We also adjust for the month sold to account for seasonality. Once all the reports have had the reported sold price adjusted, the average is calculated and this becomes the Iron Index Monthly value for that type, make and model. Finally, we compare that value to the previous months’ value and display the change in value as a percentage difference.
Article Written by DAVID DAVIDSON
DAVID DAVIDSON is the Marketing Director at Iron Solutions. With twenty years of experience in CRM and ten years in the ag equipment space he brings a unique perspective to data trends in used equipment sales and utilization of CRM’s that serve ag equipment dealers. Having written on these topics for NAEDA, SuccessfulFarming.com, and Iron Solutions, David aims to uncover and share insights that can help readers better understand trends in used ag equipment prices and better prepare for uncertainties in the agricultural sector.