Tractor Prices on the Rise, Industry Faces Double Whammy with Tariffs

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Steel tariffs are raising the price of domestic and imported steel. AEM says equipment manufacturers are trying to assess the market, determining how much of the price spike the company can absorb versus how much of the added cost will be passed on to customers. ( Farm Journal )

The high tariff atmosphere seems to be the new normal for agriculture today, with no real timeline in place for a resolution. The tariffs on products like pork and soybeans could last for two months or two years remains a mystery, and now retaliatory tariffs on products like steel are also going to cause financial pain for farmers.

The Trump Administration implemented tariffs on imported steel and aluminum from Canada, Mexico and the European Union. The tariffs- which went into effect in early June- equate to 25 percent on steel imports and 10 percent on aluminum. Those tariffs are impacting the price of everything from grain bins to combines.

“When the announcement was made that tariffs would happen, the first was that steel prices in the U.S. and worldwide went up, because they knew they had the opportunity now to raise prices for that,” said Dennis Slater, president of the Association of Equipment Manufacturers (AEM). “A lot of our members - the manufacturers-had increases of 30 to 50 percent going on in the last six months already, so they were feeling the impact even before the tariffs were implemented.”

Slater said the price of the raw material went up before tariffs went into play, but it's not over. Currently, some of the manufacturers are using steel already in-house, which means the brunt of the tariff hike won’t be felt for a few more months.

“It's a trickle effect that goes through, but then it's an avalanche later on,” said Slater. “Right now, they're dealing with a lot of machines for sale that were before the tariffs. As you get into this, now they are dealing with increased costs of their steel.”

It’s the cost of steel on the rise for U.S. steel, as well as metal sourced abroad, that’s adding to the price pain.

“Some of the steel that's out there are things that aren't produced in the United States anymore,” said Slater. “Some of these are specialized steel or certain things like castings that you just don't get anymore here in the U.S. And a lot of times that steel is coming from allies of Mexico and Canada, two of the biggest markets,” said Slater.

It’s rising costs that could have the biggest impact on machines that require the most steel in order to be built, including machines with heavier under-carriages like large tractors and combines.

“It can be anywhere from 10, 20 to 30 percent [price increase] depending on what machine it is,” said Slater. “If you just say at the lowest part that it’s 10 percent of a machine is the steel part, that's a significant amount of the machine and prices are going up 30 to 50 percent. It really puts a lot of pressure on the price of your product.”

Farm Journal Washington correspondent Jim Wiesemeyer said as some equipment makers are uncertain how higher prices will translate into equipment prices, some manufacturers are reluctant to price 2019 machines.

“I don't know how many farmers I’ve talked to the last few weeks who said they can't even get a bid on a 2019 piece of equipment, because the manufacturers don't know how much they're going to have to raise their prices because due to the metal tariff,” said Wiesemeyer. “That shows you the impact, and I think it's going to grow.”

AgWeb reached out to several equipment manufacturers about price hikes. AGCO said it’s premature to estimate the impacts of the tariffs, but there could be ways around it.

“Given that the underlying cause of these tariffs remains subject to possibly resolution by ongoing negotiation between China and the U.S., are subject to exclusion requests, and could be eliminated by approved sources alternatives the company may implement, it is premature for AGCO to estimate the impact of the tariffs at this time,” said AGCO in a statement.

John Deere Corporate declined to comment, but we reached out to local John Deere dealers who say a price hike on 2019 equipment – including tractors – is inevitable. They say the only pricing that’s been rolled out so far is on sprayers. Those prices jumped 5 to 6 percent, nearly double the average annual price increase of 3 percent. The local equipment dealers also pre-purchased several tractors to try to beat the price hike that’s expected to come this fall with “a significant price increase” expected on 2019 tractors.

Slater said price increases may be inevitable due to higher-priced steel, but many companies are still assessing the impacts, and deciding how much of the price increase they are willing to absorb.

“Some are passing it [the price increase] on already and announcements are being made out there, while others are preparing their plans for the next six months knowing that they may have to do that,” said Slater. “But they understand the price sensitivity here and that the farmers really are facing a time of uncertainty themselves. So, they know this could have an impact on their sales.”

That uncertainty is in the form of customer purchases. As farmers see the impact soybean and pork tariffs are having on commodity prices, it’s weighing on financial outlooks. Equipment companies know the muted outlooks could hamper farmer buying in the months and year ahead.

“That's one of the biggest worries is suddenly the soybean market in China goes away, the farmers are now looking at their biggest market disappearing,” said Slater. “They look at it and say ‘Okay, steel prices are up so the price of machines are up, now my biggest market is in question. I’m not buying the tractor or combine so it has a double whammy really for the manufacturer.'”

Equipment makes aren't seeing the impact of muted moods yet, as equipment sales so far in 2018 are in the green. AEM’s latest tractor and combine report showed combine sales jumped 20.5 percent so far this year. Sales of total farm tractors grew 6.5 percent. However, it’s those sales that could be curbed due to lower commodity prices heading into harvest.

“It creates uncertainty out there for the future,” said Slater. “I probably talked to 40 manufacturers in the last three weeks, and they’re starting to look at next year and they're less optimistic because of what's going on here.”

The tariffs are eating into farmers’ income, while creating higher prices on dealer lots. He points out some equipment manufacturers are waiting to price equipment until they see how other manufacturers respond in the form of pricing. However, it's those companies keeping a close eye at the political situation playing out today.

“China’s announcement to retaliate with $50 billion in tariffs against U.S. goods will target ag commodities, like soybeans,” said Leandro Lecheta, Chief Operating Officer North America, CNH Industrial. “Even when tariffs haven’t gone into effect, they still negatively impact commodity prices. Any actions that hurt American farmers also hurt us.”

“I think what will happen in the end is they [equipment manufacturers] will pass some cost on and they will also be less profitable,” said Slater.

AEM has been very vocal about the impacts tariffs would have on the equipment industry. In an advertisement released earlier this year, AEM asked Trump to say “no” to tariffs. Slater said the ripple effects are still traveling through the markets, and the extent of the effects are yet to be known.

“This whole tariff thing was to help the American worker, yet I think you're putting more workers at risk than you are helping,” said Slater. “There are 1.3 million workers that work in our industry are at risk here. So, in the end, if our manufacturers can’t sell product, they’ll have to have shutdowns, they'll have to lay people off. Right now, it isn't in that direction, but that's what they're worried about.”

He said in addition to stresses showing up in the domestic equipment market, one-third of equipment produced in the U.S. is exported. He said U.S. equipment is becoming less competitive world-wide as prices are on the rise.

“If I'm making machines in the U.S., and I sell those worldwide and compete against Chinese, Japanese and European manufacturers who don't have tariffed steel, their products are less expensive,” said Slater. “They could lose a third of their market.”

Slater said the agriculture economy is very important to AEM’s manufacturers, and uncertainty in agriculture is weighing on major equipment manufacturers today.