MITCHELL, S.D. – Sitting under a tent at an annual agricultural equipment sales event, Shawn Berry noted that orders for the machinery he sells have dramatically slowed down this year — so much so that the Ohio-based company he represents could end up to 30 percent short in sales compared to last year in some states, South Dakota and Minnesota included.
Berry is not alone. Many of the exhibitors at Dakotafest saw one effect of this belt-tightening year in the Corn Belt: Farmers aren't buying or trading in the pricey equipment because of lower commodity prices and a 95 percent reduction in a federal tax break that has traditionally benefited the sector.
"If they can't buy more equipment, we are going to have to start laying off people," said Berry, who represents Unverferth Manufacturing Co., that makes and markets, among other things, tillage, hay and grain handling equipment.
The U.S. appears headed for record-breaking corn and soybean harvests this year, but the abundant yields are driving prices lower, significantly affecting farmers' profitability since the crop will end up costing more to produce than they can immediately sell it for. Even before planting season began, the U.S. Department of Agriculture in February predicted this year's farm income would sink to levels not seen in four years because of falling commodity prices.
Upgrades happen for numerous reasons — increase or decrease in acreage, new tools to get the job done faster and better — and can be dependent on the amount of cash a farmer has on hand, according to Dale Moore, director of public policy at the American Farm Bureau Federation.
Machinery costs vary widely. A tractor capable of serving a farm that is several hundred acres can run between $40,000 and $200,000, while a combine for grain harvesting can cost $400,000.
John Horter trades in his high-horsepower tractors and combines every two or three years for his his corn, soybean and cattle farm in Andover, South Dakota. He says that helps him keep up with new farming technology and have a higher resale value — just like with a car.
This year, however, Horter had to adjust.
"We still upgraded a few pieces this year, but it's nothing like we have been doing in the past three to four years," Horter said. "Basically, our gross income has been cut in half with the prices behind, but our inputs and machinery costs have not decreased, so you have to find a way to make ends need somehow."
Farmers also have lagged in equipment buying because of changes to a tax break that had typically allowed them to write-off those items. The Section 179 deduction changes annually; it dropped from $500,000 in 2013 to $25,000 for 2014.
"If they can't deduct it, they won't spend the money," said Berry, whose sales territory includes North Dakota and parts of Canada.
Congress recently voted to set the deduction permanently at $500,000. But the proposal faces opposition in the Senate and the two houses are unlikely to settle their differences until after November's election.
Equipment leasing — although not nearly as widespread as the generations-long practice of renting land — is becoming more common primarily because the payments can be deducted beyond the new limit dictated by the tax code.
In recent years, 90 percent of operations for AgDirect, an equipment financing program for Farm Credit Services of America, have been loans and the rest leases, according to vice president Duane Maciejewski. But in 2014, leases have made up 15 percent of its lending business, while loans are 85 percent.
Experts believe the ag economy is entering a two- to three-year period of relatively low profitability and slow equipment sales will likely continue, says economist Matthew Roberts, an associate professor at Ohio State University.
It's been severe enough that Deere Co., the largest agricultural equipment maker, recently announced layoffs for more than 1,000 U.S. factory employees. Operating profit from its agriculture and turf sales fell 30 percent in third quarter of 2014 compared with a year ago, the company has said, and sales in the U.S. and Canada are expected to be down 10 percent for the year.
"Almost every farmer I know has upgraded their equipment in the last five to six years," Roberts said. "So, now, it is a matter of making do with what you have for another year or two."
Follow Regina Garcia Cano on Twitter at https://twitter.com/reginagarciakNO