Tax advantages power growth of machinery sales for 2013

Farm Forum

A flurry of paperwork took place in farm offices in the last few weeks as farmers and ranchers finished up their 2013 federal tax returns. To get ready for that, a great deal of thought went into purchases last year to figure out the impact on the bottom line.

Some of those filing taxes saw huge savings due to tax laws. Purchases before Jan. 1, 2014, allowed many farmers to take advantage of the business investment deduction. Under current law, farmers could deduct up to $500,000 from their federal taxes for purchasing equipment, rather than the $25,000 level it had been a decade before. There was also the added incentive of a bonus deduction for those who bought new equipment. The law requires taxes to be paid and filed by March 3, 2014, unless farmers and ranchers paid estimated tax by Jan. 15. With the calendar turning to 2014, those advantages have disappeared.

Farmers bought tractors, planters, combines, disks, trucks and grain carts, taking advantage of the break to upgrade their equipment. As the national farm census data estimates that $20 billion is spent in sales each year for new tractors, combines and other farm machinery, equipment sales have an essential impact on the economy. It’s estimated that used equipment sales may generate the same — $20 billion.

Farm equipment sales in the U.S. increased during 2013, according to a report by the Association of Equipment Manufacturers (AEM). According to the Association of Equipment Manufacturers, new tractor sales jumped more than 10 percent and combine sales were up 8 percent. As a new tractor can cost $200,000, it’s an investment in the future.

With the tax benefits ending in December 2013, some in the industry speculate that could impact the sale of farm equipment in the next few years.

“The last couple of years have been very good for sales of equipment,” Richard W. Strom, President/CEO of the MN-SD Equipment Dealers Association in Owatonna, Minn., said. “With high grain prices, sales have been good. This next year may be slower as grain prices may be lower. World demand continues and farm income may take a dip in the next year, but economists suggest that it will rebound rather quickly for the rest of decade.”

Precision ag and advances in technology will drive some sales, Strom said. “If a farmer can see that increased production and efficiency will make that purchase pencil out, they may be making a purchase. With advances in technology moving rapidly, it’s not just money, but efficiency that will be a factor.”

Strom noted that because farming has been good, more young people are getting into production agriculture. They are enticed by the latest technology and more importantly, they know how to operate it. Older farmers don’t have the same enthusiasm as their sons and daughters. This encourages new purchases by the younger generation. Price is always a significant factor and will be driving the acquisition of any new technology.

It’s possible that the tax advantages may be brought back later this year. In an article from Harvest Public Media, Roger McEwan, director of Iowa State University’s Center for Agricultural Law and Taxation, said the tax breaks are not just earmarked for farmers, but business in general. McEwan expects renewed calls for Congress to extend the break beyond its expiration at the end of 2013 because of sales it has helped generate for agriculture manufacturers.

Those selling equipment at local dealerships continue to see farmers and ranchers checking out equipment, searching for elements that will fit their operation.

For Dean Elverud, operations manager at Butler Machinery in Aberdeen, 2013 was another phenomenal year with very significant growth. “I’m very optimistic about 2014 and look for a lot of actions,” Elverud said. “Farmers are looking at tractors and planters. The construction industry which serves those ag businesses is very robust as well.” He noted that many new farm shops and grain bins were constructed, which was also driven by tax breaks.

While the interest in new machinery was pretty wide-spread, planters are always integral to getting the crop in each year in a timely manner. Producers want equipment that will get them in the field to get the work done during that short planting window.

Elverud said he did run into some farmers who decided not to purchase equipment at the end of the year and will wait until 2014. They didn’t need the tax advantage for 2013.

There have been some rumbling and rumors that the government will bring back the tax breaks, but for now Elverud said they are busy with spring inspections and repairs. Their business holds clinics to teach farmers how to maintain and adjust their equipment. They also work with them on monitors for precision ag.

“There is quite a bit going on here, and we’re ready for spring and ready to roll,” he said.

On the other side of U.S. Highway 12, another company is anxious for spring planting season as well.

“The last 3 years have set records for Aberdeen and for the RDO Company as far as sales of agriculture machinery,” said Evan Fonder, manager at RDO Equipment in Aberdeen. “With a strong economy in the Aberdeen area, many farmers shifted their focus to new equipment. On the construction side, agriculture has been a driving force across the whole region with the building of bins, shops, and grain handling facilities.

Looking to 2014, farmers will be looking at changes in depreciation and how that will change their operations. Evan Fonder said that the industry could see a shift to leasing equipment. Fonder said there is a lot of good used equipment on lots. This will provide farmers with a chance to trade up before the equipment is worn out.

Most activity came from selling tractors and seeding equipment. Farmers know that planters are the most important part of their business, so equipment dealers have sold many of those. Tractors are used in every operation and in many different ways.

In an area that has used mostly no-till crop practices, some of the farmers are doing medium to light tillage. They need some equipment to accomplish that. Coming off the wet years a few years back, there are also areas with compaction. Underneath that top layer of soil, compact areas have some of the driest conditions.

Some have also found that tilling a little across the top warms the ground. Crops will come up evenly.

“We’ve very excited to have the new John Deere new planter design,” Fonder said. “Instead of driving at speeds from 4 to 5 mph, the new design will up that up to 10 mph, while maintaining accuracy and seed placement. With the limited window for getting seeds in the ground, this could potentially double a producer’s productivity in a day.”

Precision is a No. 1 priority for RDO. Fonder said that increased technology is moving farming to the next phase. At RDO, in addition to parts and service, they have added a technology department. Generally, new tractors are not stocked on the lot as customers looking for new machines have them custom ordered to fit their needs.

After this last year, Fonder said, “By far there are more used tractors on the lot,” Fonder said. “With used equipment on the lots, those tractors can be retrofitted with most of the technology available on a new tractor.”

With reduced prices for crops, there are good prices for those in raising livestock. That sector also has a significant impact on the machinery business, according to Fonder.

There is no doubt that farmers will be watching inputs closely to make their operations work. “We’re looking forward to another strong year,” Fonder said. “If prices continue to be low, then 2 or 3 years from now it may be a different story. With long-term goals for yields and improved agronomic practices, it’s a supply question. We are certainly looking for a good year.”

See the Farm Forum New Equipment section that is inserted into this week’s Farm Forum.