Equipment cost perspective: how high can we go?

Brent

Judisch: We are grateful that you are joining us for another episode of the Ag View Pitch, as we know that your time is very valuable. Our team at Ag View Solutions is always here for you for any questions or comments that you may have. Please feel free to reach out to us at cbarron@agviewsolutions.com.

Chris: And now here is your host, Chris Barron. Welcome everybody to another episode of the Ag View Pitch, and today we're going to have a conversation around machinery and equipment. It's one of the questions that we've been getting a lot this summer as we've been out seeing producers, and so We're lucky enough today to have here on YouTube, and it'll also be on the podcast, but Brent Judisch with P&K Midwest. Brent, how's it going today?

Brent

Judisch: Uh, life's good. I had an inch of rain last night, so I'm happy.

Chris: Well, that's nice. We had a tenth of an inch last night, so, and we're not happy. So I guess we a lot of times are going to take what we can get here. But just as a little housekeeping again, you know, if, if you get value out of this podcast or out of the YouTube channel, please share this with, with some of the other producer friends that you have. We really try to do a good job of getting perspective out here. We're not, we don't have any sponsors or anything. We're just trying to make sure that we're getting good information to our clients and, and other producers. And so again, please share this if you find value. And so with that said, Brent, you know, one of the things that we always see with machinery and equipment is it's the second largest line item expense in our budget. We're looking at 2022.

A lot of farmers are doing the math, doing the calculations, looking at that and saying, okay, you know, what, what's my machinery and equipment plan? There's going to be a lot of money made, so there's obviously, I think, a lot of machinery being bought, and we'll address that. But just have you first of all introduce yourself, tell a little bit about, about your— what you do at P&K and, and how long you've been in the business. Give us a little background, and then we'll start diving into it.

Brent

Judisch: I started in the business in January of '87. I basically have had the same job the whole time, just been a sales rep for John Deere. I like what I'm doing, my clients I work with are great, so I've just chosen to not go into management or anything else. I like what I do and I'm going to continue doing it.

Chris: Yeah, and you farm too, right?

Brent

Judisch: We do farm north of Cedar Falls, yes.

Chris: Okay, so how's your crop looking this year?

Brent

Judisch: Corn's tough, we were dry The driest year on record in Mardo, Iowa since 1910.

Chris: Wow.

Brent

Judisch: But we have had some rain the last 2 weeks, so I think corn is going to be below average, but beans will be at or above.

Chris: Okay, that sounds good. I didn't realize we were that— we're probably that dry too then, I guess. I don't know, I've, I, I've been trying not to pay that much attention. I know we're about 50% of normal rainfall in Northeast Iowa. We're at— we're only about an hour or about half an hour away from you guys. So anyway, we better get down to business here, Brent. So you're one of the people that are— is a go-to for us. We've done podcasts with you the last couple of years in the fall getting ready for harvest. I know Shea has done some with you. What I want to do though today is to talk with you a little bit about some of the things that we're seeing with inflation and with machinery and equipment costs and things that are going on. So I'm not exactly sure where to start.

So what I, where I do want to start though, I guess, and we'll go from there, is with what we're seeing with availability of new equipment and price increases and all that. So just go ahead and give us a little background on what you're seeing with availability and price action.

Brent

Judisch: Well, availability right now is on new machinery is basically a year. New tractors are 12 to 13 months. We had an early order program on combines last week, lasted one day. All of our allotment of combines have been ordered for the next 12 months. Wow. So now they're not all pre-sold, but most of them are. We have a few machines that are not spoken for, but we had to put all of our orders in in one day. Tillage is similar. Sprayers were already sold out for the '22 use season. There are no more to be had. Price increases, the largest I've seen in my 34 years of selling. Normally we get a 2 to 3% bump a year. This year we ran on tractors roughly about 7.5%, combines about 7.7%. That's the largest I've seen, I said, in 34 years. It's a tough, it's a tough battle, but from the production side, steel's up, electronics they can't get, labor's a major issue.

So from the manufacturer side of the street, it's a really tough avenue right now.

Chris: What about sprayers? You said tractors up about 7.5%, combines 7.7%.

Brent

Judisch: Sprayers a little less. I think they're more in that 5 to 6 range, but again, sprayer is a little bit simpler product than what a tractor or combine is.

Chris: What about your, your other equipment, your off stuff, you know, your tiltage equipment, planters, that kind of stuff?

Brent

Judisch: That's all been in line with that 6 to 7%, you know, planters and tillage has more steel involved in it, so a little less electronics, but steel's gone up a lot. This year's more than doubled in price. The biggest thing on the tillage stuff is it's really getting hard to get. Availability is going to be probably even shorter than some of the mainline equipment is.

Chris: Interesting. So talk a little bit more about availability. I mean, how much I mean, how much longer is this going to last? Is— and is it affecting parts? And so, you know, what parts, like, you know, for the listeners here, are there some things that— actions that we could be taking as farmers? Do we need to be accumulating some parts of certain things, or, or what's that look like?

Brent

Judisch: Um, as a farmer, I've been preparing myself. I've got enough filters and oil on hand at least get me to spring. I know oil's been a little tighter to get than filters have been, but if you know you're going to need a certain amount of oil and filters for the next 6 to 8 months, I'd go buy them now, put them on my shelf so I have them. That's going to be an issue going forward.

Chris: So the price increases that we've seen, you know, we're talking, you know, 6 to 7% essentially across the board on everything, maybe a little higher do you see the, the price increases continuing into the next year, you know, both on the parts? And I guess I didn't ask that, you know, what's the percent of increase on parts?

Brent

Judisch: Parts has been less just because, again, you know, that's a high, a high and repetitive number. You order 1,000 filters, you only order 50 tractors, so that hasn't been near as bad. Okay. Um, well, I think the different— what we're at different this year is, Chris, is in '06, '07, '08, we went through this. We had high demand for tractors, combines, sprayers. Supply was tight. Same thing, we were out a year in advance to get stuff ordered. We went through this in '12, '13, and '14. We had the $7 corn, $15 beans, same situation. We had 12 months out on availability. Now we're in a different scenario because we have high demand, we have high prices, But they can't get parts to build tractors. They can't get labor to build tractors. We're in a whole different dichotomy now. And my concern is, will we come out of this in a year or two? I don't think so.

I think this is going to be a longer tail than we've encompassed the last two times we've been through this scenario. Used machinery values are shot up right now because new is tight. In fact, I've never seen used machinery values so high. 1, 2, 3-year-old machinery is bringing almost what it brought when it was new 2 and 3 years ago. So I'm just concerned that I'm not sure where this is going to end this time. You know, maybe if we get corn back to $4 and beans back to $10, it might slow this progression down. But I think this inflation is going to be here to stay for a while until we get ahead of this demand curve.

Chris: Yeah, one, one thing, and I told you offline when we were starting this, you know, we, we always look at with Profit Manager, we look at, okay, you're your cost of production, uh, with regard to machinery and equipment, what you write a check out for isn't necessarily your cost. Your cost is including depreciation and inflation. But one thing that we've measured over the years is that it comes down to about, about 15% of the co— of the value of the machine. In other words, we— what we see is, you know, like if inflation goes up then the depreciation goes down, just as you said, the used equipment becomes worth more. So whatever you have to trade for the, the new machine is actually worth more. And so it doesn't gain you everything you've lost because of the inflation, but it is gaining you because the used pieces of equipment are worth more.

Brent

Judisch: Is that right? Correct. And the used machinery doesn't actually go up to the same percentage of what the new does, right? But it certainly tracks it half to maybe 70% of the value of it. Everything that farmers kind of lose a little bit sight of, and I'm a farmer too, is, you know, 10 years ago my combine did this many bushels of corn per year, this many bushels of beans. Well, now I've added acres, I got a bigger head, larger combine, so the trade differences seem higher. But if you break it down on a per bushel basis, right, is it really higher?

Chris: Yeah, and we haven't seen it go up a lot on per bushel because exactly like you said, the the bushels that the machines throughput is significantly higher and it's staying pretty constant. I'm a little concerned with the 7.5% price increase that it will keep up here short term, you know, and sometimes I think people hope for these prices to come back down, but it always seems like whenever we've gone back and looked in the past, every time we've seen these price increases on the machinery, they tend to stay pretty static, especially on the new side. Sometimes we'll see the used stuff drift back, and it's usually in a category. So are there any categories that you think of machinery, whether it's sprayers, combines, tractors, tillage, planting, you know, any, any categories that, that might be some opportunities to, to be buying or to, to be trading or anything?

Brent

Judisch: Um, combines are kind of the wild card of all the things that farmers own, me included. That's the, that's the what's hardest to get the the overall cost under a certain point. And so there's opportunities. I know there's a lot of used combines out there, 5 to 6 years old. If you're willing to— maybe you need a second machine for beans, or your operation's growing, you want to add a second machine— there's some good value in buying a 1,000-hour machine compared to new.

Chris: People might think though, if this used equipment's gone up a lot, is it the right timing though?

Brent

Judisch: I mean, is it, or is that Or is it, as people have more money, the guy that might buy a 1,000-hour machine today going to buy a 500-hour machine. Okay. Because he has 550 corn to work with. So if his budget was $150,000 2 years ago, it might be $250,000 today. So there is, there are some gaps out there in the lower, lower price range, middle-hour range. If you're willing to accept a little more repairs every year and maybe have to do a little more pre-maintenance ahead of time.

Chris: Mm-hmm. Okay. We'll come back to some of this, but while I'm thinking about it, I wanna ask a question and make a little bit of a statement on the front end of this with regard to replacing machinery and having some sort of a consistent plan. So one of the things that we do with our clients is we have what we call the 3-year plan with machinery and equipment replacement so that you can prioritize your fleet and say, okay, you know, on— in, in '23, we're going to trade this tractor. In '24, we're going to trade this combine. And in '25, you know, we're gonna, we're gonna update a planter or whatever. And so we like to put that together so that we can figure out, okay, what's the capital requirement going to be in, in the next 3 years? What's that look like? What's the priorities that we will need to replace?

And a lot of times, I'm sure you see this, is you'll have brothers or cousins or, you know, family members farming together or business partners family farming together, and they all have sometimes slightly different priorities of what should be replaced, what shouldn't, you know. And if they can put a plan together and put it out there for 3 years, and, and that's what we try to give you, you know, so you know, okay, here's, here's, uh, what the plan is for the next 3 years. Then when you're going to trade with other people, you really have an idea, okay, I could, I could take that tractor they have and I could trade it and I can, I can get them a better deal. Talk a little bit about that. Is that something that you think is a value that people, you know, should maybe be doing a better job at communicating with their, with their equipment dealer?

Brent

Judisch: And most of your progressive farmers have a 1, 2, and 3-year plan. They have a budget. Now granted, you know, 5.5 corn changes the budget a little bit.

Chris: Yeah.

Brent

Judisch: But if you have a 1, 2, and 3-year plan, you know what you should put repairs in and you know what maybe you can run another year. But if your machinery salesman, whoever that is, is aware of it and he knows you've got a 5-year-old tractor and he knows he has a buyer for it and he gets a 1-year-old traded in, he knows you're ready to move that. So he can maybe give you more for yours knowing he's got it pre-sold. And then like now with price increases coming, some guys bought tractors before the price increase. They knew they had a need. They knew they're going to buy a couple tractors this year. So we went out, approached them. If you can get a tractor built before October 31st, it's going to be low price. And so let your dealer know that. Talk to him, work with him. You know, he's not out there just to sell you stuff. He's there to help you be more profitable.

And if he can save you $20,000 on a trade every couple years, that adds up over time.

Chris: And then you'll probably come back and buy something else if you can save $20,000 for somebody or get somebody in, you know, better piece of equipment maybe even sooner, or, you know, see those things has a ton of value.

Brent

Judisch: Or he gets a new combine, the wife wants a new Gator, so it's always a good thing for me.

Chris: So yeah, yep, well, I understand that. So, um, as we, um, head into harvest, you know, there's the, the practical and the real-time issues that we deal with, right? And so, you know, what, from a, from a parts standpoint, again, I know I asked that, but What things do we need to be doing as farmers as we get into harvest? And you can talk a little bit about just maintenance and some of the things on the combine probably too here in this question, getting things ready for harvest.

Brent

Judisch: We've talked in the past about preseason maintenance. Get your combines in, whether you inspect them yourself, get them in the dealership. Um, daily parts have been okay.

Chris: Okay.

Brent

Judisch: We're okay on that. Now, if you happen to hit a tree this fall with the unloading auger, that might be an issue, but you can't predict that. But your common stuff, your wear parts, your corn head parts, your bean head parts, they're pretty good right now. But if I knew I'm going to need something through the fall, I'd have them on my shelf today. I wouldn't wait until middle October and say, yeah, I'm gonna have to put new chains on my corn head, they're getting wore. I wouldn't be waiting because if everybody does the same thing and it gets a little, you know, get another busy fall, could be a little tight on some of the wear parts.

Chris: So bearings and belts and that kind of stuff's pretty good, but it's the You know, it's the gearboxes or something that's a little bit higher dollar or some of those things a little more harder to get.

Brent

Judisch: Yeah, your high maintenance stuff, you know, because corn, yeah, 12-row corn has got 24 gathering chains. Well, if we only have 60 on hand and 3 guys come in, somebody's short already. So the high wear parts, sickles for platforms, maybe a belt for the platform if you have a draper, those things are probably going to get a little short. Right now they're fine, But if we have a normal year, that could be a little tight if the supply chain is getting— you know, the trouble supply chain is, is actually trucking. Deere just can't get the parts they need right now. There aren't enough trucks, aren't enough drivers, aren't enough people in the warehouse to unload the parts to get them to us. And so the whole thing's kind of backed up right now. It's just not one part of the equation. It's about 4 things in the equation.

That's what concerns me going forward is if they're all lagging right now, where do we go from here?

Chris: And one thing that you've brought up a number of times is the labor piece of the component. What's labor look like for a lot of the dealerships in your opinion? I mean, do we have enough, are there enough mechanics? And I know one of the things that I hear farmers, and I told you offline I'd bump you on this one, but you know, a lot of times farmers are like, well, if I can fix that myself, just if you look at the labor rates, in the shop, they're pretty high. But on the same token, you know, the question is, what's that look like for availability for you guys to have really high qualified mechanics, you know, in the dealerships?

Brent

Judisch: Right now, labor availability is— we're okay. Every store could use another person or two, but we're not short, so to speak. My concern is, is going forward, I've been doing this 34 years. A lot of our key people in the shops been at it 25, 30, 35 years also. I'm worried about what's going to happen in 5, 8, 10 years because we don't have the young people coming up. So, and we're adequate right now, but the people that we have experience know how to get you going. Maybe the part's not there, but I can get you going for a day or two till I get the right part. The young guys don't know that, and we need to bring in some young people now that are willing to learn from the older guys. Just like farmers. Yeah, you gotta learn. Experience, experience, experience, and you can't buy that.

And when our average technician's probably 15, 18, 20 years in and we have hardly any that are 2 to 5 years in, that's going to be a concern going forward. But today, right now, we're pretty adequate.

Chris: Okay. So what's the solution for that issue? You know?

Brent

Judisch: Well, you know, if I was a young person, I'd want a computer job. They pay me a lot. I don't do a whole lot. But we can't all do that.

Chris: Right.

Brent

Judisch: And so there's a lot of openings right now in the ag tech world. There's openings in the automobile tech world. There's a lot of places out there to make a good living if you're willing to get a little dirty and learn, but it's also rewarding. I mean, farmers are different than the average people, so they're more fun to work with, they're more, they're more reliable, you know. Um, and so I think if you get into the ag world, people would learn that it's a great place to be, but we have to get more people energized to start those jobs.

Chris: Yeah. Okay, last question. Anything else on, on as we think about harvest just around the corner, and I know there's guys in the south already rolling. Any final thoughts, comments as we head into harvest that you got?

Brent

Judisch: Just be patient. I'm hoping we're getting an early start this year. You know, as farmers, we all get the gotta-go-Joe-itis. We want to go, go, go, go, go. And sometimes take a little extra day, maybe do a little more maintenance, maybe check things over, check your tire pressure, some of those simple things. I think a lot of guys forget that. One thing that guys need to do is, you know, every combine today has AMS GPS stuff on it. Don't wait till you're in the field the first time to see if it's working or not. Get it in there ahead of time. If you need to call your dealer or have somebody come out, but get it working before you go to the field. Because I get 10 calls a day every day the first 4 or 5 days of harvest. It's not working, it's not working. Well, did you put it in? Well, no, I put it in this morning. Okay. Well, sometimes it's my GPS doesn't work.

And well, is your globe plugged in? Oh, I'm not a globe on the roof. Well, that's probably the problem.

Chris: Yeah, that's so. Gotcha. All right. Well, hey, Brent, I think this has been a great conversation and appreciate you bringing the good and the bad news, I guess. The bad news is we're facing some pretty steep inflation. The good news is we have some prices to offset that a little bit. They always go hand in hand, don't they? It's kind of a margin, margin business. And, and when we have the opportunities, um, to do some trades and to do some things, we're just gonna have to keep an eye on parts and, and make sure we plan and don't just react when things happen. Make sure we get a good plan.

Brent

Judisch: Yeah, the best time to buy machinery is 3 months before you need it, or 6 months. Don't buy it today you need it.

Chris: Yeah, exactly. So Brent, thanks a lot, really appreciate it.

Brent

Judisch: Thanks for having me.

Chris: You bet. So Brent Judisch with P&K Midwest. If they want to get a hold of you, what's a good way if they have a question for you specifically?

Brent

Judisch: If I'm on Twitter, I'm on Facebook, either one.

Chris: Okay, sounds good. So, all right, well, thanks everybody for listening and watching, and we'll catch you again next time on the Ag View Pitch.