Equipment economics for 2022

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Welcome everybody to another episode of the Ag View Pitch, and today we're going to have a conversation on equipment economics. And so we're fortunate enough to have Brent Judisch with us with P&K Midwest. Brent's kind of been our go-to all the time when it comes down to understanding machinery and equipment. He's got a vast knowledge of things going on in the equipment environment with sales, trades, auctions, you know, values, and all those kind of things. So Brent, how's it going today?

Brent

Judisch: Oh, it's a great day. We haven't had winter yet, so I'm happy.

Chris: Yeah. So you're, uh, you're enjoying the nice weather and, uh, and it sounds like from talking to you the other day, you got a lot of equipment moving.

Brent

Judisch: Uh, yes, it's very brisk and the phone never stops ringing.

Chris: Yeah. That's what you were saying. You, if you, if you could just be on the phone 24 hours a day, you could almost keep up, right?

Brent

Judisch: Yeah. I need about a 40-hour day. That's not going to happen.

Chris: So yeah. Yeah. So let's start there for a minute. You know, obviously on the equipment side, because of a coming off of actually probably 2 years of reasonably decent on-farm profit or profitability in most cases, it's got farmers looking at, okay, maybe our equipment fleet has been neglected a little bit for a period of time here now. You know, this piece and that piece that, you know, we've been kind of putting off that we need to update. What are some of the things that you're seeing, or some of the hot items and some of the things that are, that are maybe in short supply because, because they are a hot item and the values have really increased on?

Brent

Judisch: Well, the right now, the two hottest items are tractors, obviously, but probably more importantly, combines. Combines are the one thing that guys are probably kept longer than they anticipated. Um, we're— we have a lot of right now 2012, '13, and '14 model year trade-ins guys want to update. Um, we sold a lot of new combines back in that time frame, but they still have them. And so they haven't traded the last 2 or 3 years because the economy was kind of tight, prices weren't that good, input costs were too high, and so guys were watching their bottom line real close. Now they're in a really strong need-based trade cycle. And so everybody seems to have the same trade-in. About every phone call I get, it's a 2,000 engine hour combine. They need to go to something with 1,000 hours. And so that's been the hottest thing.

The other thing has been tillage, you know, with last spring's late frost, some of the heavy trash, there's some frost damage. A lot of guys are going back to some tillage. So There's been a huge demand for new and used tillage this year. Very huge.

Chris: What are you seeing? Let's start with the tractors. You know, you said tractors are hot items. You know, is there a certain age range that's hotter than another? And what are you seeing for, you know, say, percentage of increase in value for that used thing that the guy is bringing you to trade for, say, a year-old, 2-year-old or something? Talk a little bit about that.

Brent

Judisch: Well, the hottest demand right now is in the 5 to 10-year-old price range. Um, that gets you back from say $150,000 to $220,000. And the reason is a lot of guys have added a few acres. Uh, they probably added maybe a planter, a planter to plant beans with. So they want to add a tractor and they got a budget. And then in the Deere, to be a late model 30 Series or early Series R, Um, they've come up at least 20% in the last 6 months, if not more. Um, both on our lot, on auctions. You know, you follow Machinery Pete, yesterday $84,300 on the auction, $170,000. That was at Manchester, Iowa. Last spring, $150,000 would have been a good number for the same tractor. So, but at the same token, our 1, 2, 3-year-old stuff, like you and I talked yesterday, That stuff's crazy because new ones have jumped about 14% this year.

So when the new ones go up that much, the used ones have to follow accordingly.

Chris: What, what are— what's the new equipment doing across the industry that you're seeing as far as new tractors? And we'll get to availability a little later, but just with respect to cost, what's the cost increase you're seeing? And then is there any thought process as we think about '23 and '24? Because when you order something, it might be a lot longer than what you want it to be before you're going to get it. So talk a little bit about that.

Brent

Judisch: Well, we normally have a price increase end of the year, model year options change. That's normally in that 3 to 5%, you know, most years. Well, this year, because of COVID because availability, because there are other items, we had 3 price increases in the last 12 months, and that equals On some smaller stuff, about 14%. Larger stuff, more like 9%. But still, we're talking a tractor that's $500,000, 9% of that's $45,000. That's a lot. I mean, as stuff gets more expensive, small, small increases add up to be big dollars.

Chris: So is, if you're a producer listening to this and you know you're going to be updating a tractor in the next couple of years, what, what's the person need to be thinking about?

Brent

Judisch: Well, availability is not great right now, um, and it's not because they don't want to build stuff. They can't get parts, they can't get tires, can't get wiring harnesses. And so we're going to be in a tight situation here. I'm thinking 18 to 24 months. You know, the last time we had these cycles, we had it in '08, '09, and '10. We hit it again in '12, '13, '14. The difference was then is the manufacturers had the ability to produce more, Chris. To meet the demand. Now they can't. I mean, they're maxed out. Whether they sell 10 tractors tomorrow or 20 doesn't matter. They can only build so many. So the scenario we're in now is going to be a long tail. So if you're looking for something, I'd be getting a plan. You and I discussed have a 1, 3, and 5-year plan.

And even when the economy gets a little tough, stick to it, because you get out of that cycle on trading stuff, all of a sudden it's going to be sticker shock if you run that tractor maybe an extra 2 or 3 years longer than you wanted to. Now you're looking at a large difference in the end.

Chris: Yeah, that's, that's one of the things we always work on when we're looking at equipment cost is part of the cost of operating that equipment is, uh, two things you don't write checks for: depreciation and inflation. And you need to analyze that as a cost every single year so that it keeps you on target with replacement. And, and like I said, you know, it's hard to replace everything at once, but if you can do a little bit along the way all the time, you can kind of stay current. I have another quick question before we move back to the combine thing for a second. But, you know, you're talking like 9% increase over the course of the last 12 months on new tractors. You were talking about some used stuff, and in that, you know, 20%, you know, that stuff that's, you know, maybe what'd you say, 5 years to 10 years old equipment, up 20%.

Wouldn't that be— make it kind of a good opportunity or a good time to upgrade to, you know, take that 7-year-old tractor and update it to a year-old or a 2-year-old? Is that— even though the cost increased is there, in some instances those trades are probably a pretty good deal, aren't they?

Brent

Judisch: And they are. And that's why it's been so busy for us. Um, guy walks in with a 10-year-old tractor, wants to trade I have immediately have 4 or 5 guys I can pick up the phone and call and find a buyer for it. So yeah, if you have the ability to do that trade right now, it's great for you and it's great for us because there's a long list of people willing to buy that tractor in that $150,000 to $250,000 price range. It's just a matter of getting the phone and calling somebody.

Chris: What kind of terms, you know, one of the things we've had a conversation with the economist that's gonna be at our conference in Arizona this, um, in January, and we were talking about just managing working capital and keeping, keeping cash available on the farm. What kind of terms are you seeing that are advantageous for farmers if they are updating some equipment?

Brent

Judisch: Well, most of our interest rates right now, even Deere and third-party sources, you can get around 3% interest fixed for 5 years. If you have a higher balance, you probably get less than 3%. That's pretty cheap. I mean, when you can go borrow money at that on a 5 or 6-year fixed note, keep some capital for a land purchase or maybe a bin site or something and finance the tractor. As long as the cash flow matches your, your, your working capital situation, it's not bad to finance it as long as you, you know, you're budgeting for it like we discussed.

Chris: Keeping some dry powder around is always a good thing.

Brent

Judisch: So, well, you never know when that Ford you cross the road might become for sale.

Chris: Well, that's true too, but I would also argue it never hurts to have that cash there for operating. And, you know, because that operating money, you know, if you can lock in some of the, some of these intermediate expenses at these low interest rates and keep some of the cash available for operating, these operating lines and the interest in that category is probably something that may be a threat in the next couple of years. One other question, and then I want to hit combines a little bit, but lease versus purchase is a question we get a lot. And then I always am like, well, you know, give me a side-by-side, and then I'm going to call Brent Judisch. I'm going to, I'm going to send him the side-by-side comparison, and then we're going to talk about it, and then we get back to them.

But, you know, what are you seeing, and what are the benefits of a purchase versus a lease, generally speaking?

Brent

Judisch: Um, if I have a machine in equity, there's no reason to lease the next one. No reason at all. The reason leasing, leasing is so prevalent now, Chris, is you see these large auctions coming up, large farmers retiring, getting out. So if my operation is going to add 20% of my acres to next year, and I'm going to have to go put a lot more money out for, for working capital to put the crop in, pay the rent, leasing is a great way to acquire an extra tractor, an extra planter, an extra combine because it's a non-balance sheet liability currently. Now, I mean, there's been some discussion about the bankers about changing that, but if I gotta tie up some extra capital and go out and rent some more land and pay the inputs, and I can go lease a tractor for that $75 an hour range, I'm probably gonna lease it for short term. Most of our leases are 3 years.

After 3 years, you, you have the first chance to buy the tractor. So in this scenario today, where new ones are going up, usings are going up, they're almost always in equity. So I'm not gonna give that equity up after 3 years. I'm gonna buy the tractor out of the lease if I need to. So if I'm gonna add a piece, leasing's a great way to go. But if I currently have equity, to turn equity into a lease does not make very good sense, not tax-wise nor cash flow-wise. Mm-hmm.

Chris: And I know in a lot of individual situations, I've talked with you, I've sent you a couple of side-by-side scenarios and be like, okay, which way would you go? And, and some of those scenarios are pretty individualistic too, aren't they, as far as what the goals of the operation are? And like you said, you know, what's the, the rest of the fleet look like? And, and, you know, does it really make sense?

Brent

Judisch: Well, and if I'm a 70-year-old farmer, we're going to farm 3 or 4 more years, I want a new tractor, I can afford it, then I'd lease it. Lease it, get my hours out of it. When I'm done, turn it back to the dealership and I'm done. I can walk away from it. You and I had that, you know, 8 years ago when you you started your stuff where it's an easy exit strategy on a lease. So if I'm, if I'm close to the end, it's a great way to go. But if I've got 10 years left in my farming operation, it's probably not the best way to look at it.

Chris: Right. So let's hit combines again for a minute. You said, you know, tractors and combines are the two hot items, and then we'll touch on a few other things quick. But with, with combines, you know, same sort of question, what are you seeing for price increases on the used equipment versus the new, new ones and that kind of thing?

Brent

Judisch: Well, the new ones have kind of created a gap. If you have 3 to, 3 to 5-year-old or less, they've gone up in value to kind of mirror the new. Um, the issue is in the 5 to 10-year-old, like I discussed earlier, everybody has about the same trading right now. That market can't go up because right now there's 600 Class 8 used John Deere combines that are 2012, 2015, and that market's kind of level because it's loaded. I mean, everybody seems to have that 2,000 engine hour, uh, middle teen separator hour combine. And the reason is we sold a lot of new ones back in that '12, '13, '14 time frame, but because the economy got tight, they should have traded in May, maybe '18 or maybe '19, and got something newer. But like we discussed, cash flow was different. Prices of grains were pretty low. And so guys kept those combines. Well, now they've run it an extra 2 or 3 years.

They've added a few acres, they added a few bushels. Now all of a sudden they're in a need-based trade cycle, not necessarily a want-based, but a need-based.

Chris: So for some of those operators, would it make sense to fix that 2,000-hour combine if they've gained a few acres and buy another one in that price range and make sure and, and run those 2 machines? Because there's an excess inventory of that vintage of machine. Does that make any kind of sense or not? Just came to my mind, throwing that out.

Brent

Judisch: The biggest trend in the last 2 or 3 years has been that, Chris, where a guy has— I have a combine, I like it, I know it, it's been dependable, it's been good to me, I've added a few acres. So yeah, they're going to go out, they're going to add a combine. This is where the lease may come in. They may lease that next one. But they're gonna keep that one if they wanna run beans in the morning or in, in the afternoon and corn in the morning and they got two machines or they'll go out and buy a second Draper or whatever. And so a lot of guys have been holding onto that second machine and finding out that, you know, a year like this year wasn't so bad 'cause the weather was good. But in '18 and '19, the guys that had already done that worked out because the weather was against them. Mm-hmm. And you like what you have and it's been dependable.

Um, that's why our service— our service shop right now is booked. We have enough combines booked till next fall because a lot of guys are going to keep that extra machine, but yet they still need it gone through. So they'll go out on the market, add a machine, maybe lease it. But, um, but it's a need-based thing, you know, whether it be repairs or acres, it's getting to be a need-based purchase.

Chris: So we've talked about power units with regard to tractors and combines. What about sprayers? Anything, any, any news there? Anything people should be aware of on sprayers?

Brent

Judisch: Sprayers is all about technology, Chris. ExactApply, that's the big buzzword right now. Individual nozzle control, that's where it's going with dicamba and all these options now we have for, for chemicals. You know, sprayers, you can run a sprayer a long time. It's not pulling anything or doing any major work. It's just more of a driving hour. So hours on sprayers don't really rack up and cause a major issue, but it's technology-driven. If I can go to a bigger boom, spray faster, I have nozzle controls individual, the sprayer is probably the fastest cash flow item on the farm to justify. Bar none.

Chris: Right. Yeah, we see that too. So, um, one other question, and I want to get to a couple other things, but so you talked about tillage, you talked about, um, you know, planting equipment, uh, that kind of stuff. What are you seeing for price increases there? Any, any suggestions or thoughts there for guys that need to be updating planters or tillage equipment and that kind of stuff?

Brent

Judisch: Well, planters is back to the sprayers, all about technology. It's all about Exacta, or it's all about the row shutoffs, all about, you know, speed, 10-mile-an-hour planters. It's all about efficiency. Um, the planting price increases haven't been as drastic as tractors and combines. Because there's less, you know, less, less part of the machine. So the price increases there haven't been as bad. So the, the sticker shock on planters has not been as big a deal. Um, so that's been a good sales— or I know we sold a lot of planters this year in about 2 weeks again, which is crazy, but that's, you know, that much demand right now. Um, the biggest uptick for us has been tillage. A lot of new tillage been selling, a lot of used tillage has been selling. Um, Tillage stuff doesn't go up a lot in price. You know, no technology, there's no software to it, just piece of steel really.

So that's been more in line. But what has gone up is the value of late model tillage. Um, you have a late model chisel plow or vertical till is the biggest buzzword right now. Everyone wants to go to a later vertical till, or in your case, strip till. So we're seeing a large number of guys going to strip till or to vertical till. And they're buying new machines and that's been, that's been really busy for us. Mm-hmm.

Chris: Okay. That's good. So one of the things you and I talked about the other day, sort of offline that we, and we talk about it all the time, but is, you know, having a plan, you know, and not just a plan for this year, but like having maybe a 3-year plan of machinery and equipment fleet update so that, you know, the dealer understands what the producer is thinking so that you know there's this tractor, this tractor, and that tillage tool, and that combine, and that sprayer that's going to go in the next 3 years in this particular order. And if you have that information, it helps you be able to help the producer manage their fleet inventory and, and budgeting and all that. So can you talk a little bit about that, or kind of what you see with your quote-unquote best clients that you work with and, and some practices that, that people need to keep in mind?

Brent

Judisch: Well, it's our job to sell you solutions. You know, we want to sell you something, but it's our job to sell you solutions and sell you what's going to make your profitable, you know, your farm profitable. And so if we know what you're thinking, know that, well, this year's the tractor, next year it's combine, the year after it's a grain cart. If we know that, we can keep an eye on when the new programs are the best. Or we can keep an eye on that 1-year-old low-hour tractor that the guy doesn't farm much with, that trades every year. If we have an idea, it helps us on two fronts. A, I kind of know what you're looking for or when to sell it to you. But B, if I know what you have for trade-in, maybe Farmer C's looking for your tractor with 1,000 hours on it or your sprayer with 2,000 hours on it.

If I can go bang, bang and take the first one out, the second one out, it helps me a lot. Helps me plan my next, my next sale. But also it just helps me, you know, it helps you and I both, you know, well, maybe we haven't this year, we got an opening in our slot. And in your case, because we just go strip till, maybe we should update the strip till. You know, if you have a plan and stick to it, it just gets to the point where, okay, well now we're not where I was combines. My combine is now 9 years old. It's got a lot of hours on it. Now what do I do? You know, get a plan and stick to it. It helps you as a farmer because you have a budget and you're thinking about, okay, can I get my combine one more year? Will my planter run two more years? You know, maybe I should put some money in the planter and repair it. Um, but it helps both of us. I mean, it's a team thing here.

I mean, get your salesman and tell him your plans. I mean, then he has an idea what to look for, when to look for it, and how to proceed. And then if I know I have your trade-ins sold, It's easy to come to you and say, hey, farmer, I got a hot deal here on a 1-year-old tractor because I can sell your used one that's 4 years old. It makes life a lot easier for us.

Chris: Yeah, and it's an economically feasible plan for, for the farmer too. It's a, it's a win-win.

Brent

Judisch: Um, I think, I think guys get lost. You know, we discussed the combine often, you and I. Guys have to go back to a per-bushel basis on this combine.

Chris: Right.

Brent

Judisch: I mean, sure, it's a sticker shock and a new one's $530,000, but look at it as a per bushel basis. I mean, my bushels, my acres figured out. I mean, kind of get a plan and try and stick to it.

Chris: Yeah. It wasn't too many years ago, we, most of us were harvesting 180 bushel corn. Now, if you're harvesting, you know, in the Midwest anyway, in the I-states, if you're, if you're able to get in a position where you're picking 100 or 220 or 250 bushel corn, all of a sudden you start dividing that per bushel cost by the total dollars, you know, it's sort of relative to what it was before. It's just, you know, it's like you said, that's a good point. So kind of want to wrap up with one other topic here, Brent, with regard to supply chain issues. We'll start with new equipment. If somebody's ordering tractors, combines, tillage, what's that look like? And then I want to get to parts, but let's do, you know, let's do the equipment first.

Brent

Judisch: Uh, we'll start with the easy one, spring tillage. We had to have them orders in right after spring to get a new piece of tillage for spring. It's probably not going to happen. Fall tillage, we're ordering now, very available. Rippers, strip-tills, vertical-tills, very available, not an issue. Planters, That's, that's a 12-month cycle. Again, you got to get your planter ordered after you plant, so they're gone. You can't get a new planter for until 2023. Combines in the Deere world, we normally have until January to order combines. This year we got sold out in November, so that's done. No more new combines available until '23. Tractors aren't quite as bad. A track tractor is probably 8 to 10 months, but a wheeled tractor is probably more like 6 to 8 months. There's more availability of tires than there is tracks right now.

So those aren't quite as bad as they have been, assuming that the supply chain can meet the manufacturer's needs right now. That's going to be the only hitch in the getalong is, can they— you know, the biggest, the biggest shortage right now is steel piping for the tractors and harnesses. Getting wiring harnesses from manufacturers is really tough. So that's kind of kept a little bit of a lid on what they can build.

Chris: Okay, so my last area of concern and question for you, um, as we work into and through winter and towards spring here, um, what, uh, what parts for the average producer that's growing corn, soybeans, wheat, cotton, all the different stuff you got, everybody's got tractors and sprayers and tillage tools and planting equipment. What are the key things that we need to make sure we have our inventory in our shops so that we aren't sitting there being down too long? What, what, what are the key things we need to make sure we have on stock?

Brent

Judisch: Well, for spring, and when it comes to those things that wear out, field cultivator sweeps are going to be tight. I've already got mine in the shop for next year. That's gonna be the high-wear items are gonna be tight. Disc blades, planter scrapers, planter openers, coulters for planters. Tight. If you need them, get them. We actually ran out of the Telc graphite mix this spring. Same thing. If you know you're gonna need it, go to your dealer or whatever brand you are and get it coming because those high-use items are going to be tight again, real tight.

Chris: Okay, that's interesting. So any, um, anything that as we think about the whole year, if this supply chain constraint is something that lasts for a couple of years, which is kind of what we're hearing from some of the economists that we work with and stuff, is there anything harvest-wise that we can get a hold of now that could be a constraint later on, or anything on, you know, throughout the whole course of the year. Hay equipment and all that kind of stuff too.

Brent

Judisch: Uh, for harvest, the same thing, high maintenance items, sickle sections for, for platforms and drapers, gathering chains for corn heads. This year you couldn't buy either in season. If you know you might need 'em, go grab 'em. That's, I'll guarantee you, this is gonna be tight again this year. You know, if you and I have the same discussion in 12 months, Chris, it's not gonna change.

Chris: Yeah, so that was my final, or what I always call my last, last question. In your crystal ball, um, and your experience and your years of, of working in this industry, have you ever seen anything like this? And if you had to predict, how much longer do you think we're going to have to deal with these constraints from supply and, and demand?

Brent

Judisch: Well, in my 35 years, this, I said, this is the third cycle where I've seen a really good farm economy really good demand. But this is the first time we had constraints on manufacturing, on shipping, on purchasing. You know, we combined the last two cycles, and within 18 months we were pretty well out of the, the good time. Um, this thing here is going to be different, different go-around. Um, 18 months is not even going to be close to cutting it. I'm guessing 24 or longer if we happen to have a good crop next year, Chris, and we have $5 corn, $12 beans. This is going to run through the '23 year. There's no, no way around it.

Chris: Yep. All right. Hey Brent, this has been a great conversation. This will be a popular podcast because one of the number one questions we get every time we sit down with the client is on the equipment management side and just kind of figuring out what the economy looks like and then also what we can afford and what we can, uh, manage from the equipment economics. So Brent, really appreciate your time.

Brent

Judisch: Thank you. You guys have a great day.

Chris: Yeah, will do. I'll be bugging you sometime. We'll probably have to be talking to you again soon. Thanks a lot.

Brent

Judisch: Thanks.

Chris: Thanks everybody, and we will catch you again next time on Tech 2 Pitch.