When the chips fall so do farm machinery sales

Farmers can buy it, but makers can’t make it; supplies of everything from computer chips to steel are failing.

Farmers in the United States, flush with cash after a run-up in grain prices, are clamouring for farm machinery in time for this year’s harvest.

This is a boom time after years of depressed demand.   But manufacturers are scrambling to keep up because disruptions all along their supply chains have left them short of the steel, plastics, microchips and tires they need to make tractors and combines.

Some suppliers in the U.S. and Europe are facing a labor crunch because of the coronavirus pandemic.

The supply logjam has hit Agco one of the world’s largest farm machinery makers, just as planting season gets under way in the Northern Hemisphere.  The Southern Hemisphere is in the middle of its harvesting season.  Agco had to tell customers they may have to wait as long as six months for their machinery, effectively too late for the harvest in the U.S., a major producer of corn and soybeans.

“Our factories are hungry right now,” said Greg Toornman, who oversees Agco’s global supply chain management.

The farm equipment maker is not alone.  Other farm equipment makers are affected by the supply logjam.

As the U.S. economy roars back from the pandemic-induced recession, it is generating unusually high orders for parts and materials at a time when inventories are at the lowest levels in decades and the pandemic and weather-related disruptions have left global supply chains in a mess.

The Institute for Supply Management’s index for new orders in March hit its highest level since January 2004, while the index for order backlogs, one of the best U.S. metrics for how quickly manufacturers are meeting demand, was at the highest level in 28 years.

The delays and lack of needed materials are holding back the pace of economic recovery, translating into inflationary pressure and threatening to weigh on corporate profits.

For farm machinery companies like Agco, whose business is highly seasonal, sourcing problems could mean lost sales.

Lonn Schlueter, an Iowa-based dealer who sells rival equipment maker CNH Industrial’s New Holland tractors and Kinze’s planters, told Reuters he is scouting for used tractors as the orders for new ones are not expected to be delivered before the end of the year.

“The big problem is getting inventory, getting the product to sell,” Schlueter said.  “We are told that the manufacturing is really delayed because they can’t get raw products to finish up the machines.” 

Tractor supply in North America is the tightest in 18 years, according to Jefferies Equity Research.  A recent Morgan Stanley survey of U.S. farm equipment dealers noted concerns about the potential impact of a lack of inventory on sales.

Dealers of all major farm equipment brands complained of tight inventories.

In February, Deere told investors it was facing growing constraints for some electronic components.

Agco is prioritizing orders that dealers have received from customers over those placed to replenish stocks at showrooms.

Chief executive Eric Hansotia said he is talking to the company’s top suppliers and using “creative solutions” to get a handle on the supply situation.

Many are trying to leverage their network of global suppliers to address the shortfalls.

For example, capacity constraints and dwindling rubber supplies in part due to strong Chinese demand are causing tire shortages.

It’s our number one challenge right now by far — managing all the logistics and the volatility in the system.

It is a sharp contrast from last spring when machinery companies including Agco were cutting production, anticipating a prolonged downturn in equipment demand.  Back then, no one expected “a hot market like this.

Procurement teams are working feverishly to secure alternative supplies of semiconductor chips, steel and plastics.

While farm equipment makers require far fewer chips than automakers, the drive to make their machines smarter has made them susceptible to chip supply shocks.

Meanwhile, a slow ramp-up in steel production following the cuts last year has made it difficult to procure the metal on time and at a competitive price. Similarly, mass blackouts in Texas following a historic February storm has sparked a global plastics shortage.

Wait times for raw materials has doubled.  Steel shortages are expected to persist through the year.  There is also no clarity on when the supplies of plastics will normalize.

There never seen anything like this.  Many are calling it the perfect storm with no sunshine in sight. 

If you need any further help or have any questions about backhoes, tractors, implements, or anything else equipment-related, please contact your dealer, local mechanic, or call us at 602-734-9944.  Please ask about our current new and used tractor supply.

If you are looking for old, vintage, classic, or new tractor parts, send us a part request.

Team Tractor Ranch - #1 Tractor Dealer in Arizona. We sell and service most major brands of tractors including Yanmar, Kubota, John Deere, TYM, Mahindra, Kioti, Case, New Holland, Massey Ferguson, Ford, Deutz, Case IH, Farmall, International Harvester, Branson Tractors, LS, Shibura, Claas Tractor, McCormick Tractors, Valtra, Solis, YTO, Montana, and Nortrac.