IEOC 2020-21 Farm Equipment Outlook Update: The Recession is Over

Eli Lustgarten, President of ESL Consultants and popular IEOC speaker, has been sharing his insights about our industry’s key customer markets at NFPA’s Industry & Economic Outlook Conference (IEOC) for over 20 years. Besides a “Fluid Power Customer Market Overview” presentation, Lustgarten employs his advanced industry analysis and ties to industry peers at many ag equipment manufacturers to also deliver an “Agriculture Machinery Forecast” presentation. After observing a dramatic change to the farm sector outlook over the last several months, Lustgarten has issued an update of his ag equipment outlook for NFPA members with commentary regarding these changes below.

At the end of all my presentations on the farm sector, I always state that WEATHER was the ultimate key variable. At the 2020 NFPA IEOC, I also noted that the problems in 2020 were being further exacerbated by the China tensions, the COVID-19 pandemic and the uncertain political outlook and the resulting economic policies.

All these factors have changed! The dramatic reversal of the negative influences on the farm sector literally began during the NFPA IEOC. The result has been the end of the farm equipment recession and a high probability of at least a double-digit gain in demand in 2021 rather than the projected modest improvement; Happy Days Are Here Again.

What Happened: At the NFPA IEOC, the underlying fundamentals suggested that 2020 would be the seventh year of the farm recession:

  • Great yields and increased acreage for the past six years translated into bumper crops and excess U.S. carryovers depressing commodity prices.
  • The optimism surrounding the fall 2019 China trade deal was impacted by the rising tensions of the trade war and the African Swine Flu outbreak in China resulting in the destruction of up to 50% of their hog herd.
  • The COVID-19 pandemic dramatically reduced U.S. and global economic activity.
  • Uncertainty was increasing about the political outlook and economic policies.

As the NFPA August 11-13 IEOC Conference came to an end, a major weather pattern called a DERECHO developed beginning August 10-11 and rampaged through the Midwest, significantly affecting Iowa, Nebraska, Illinois and Indiana. (A DERECHO is a widespread, long-lived straight-line storm with 100+ mph winds, extremely heavy rains and an occasional tornado). Over the next few months, we learned of the wide-spread damage to tens of millions of acres impacting the corn and soybean crops that were still in the ground. Compounding the developing problems was the impact of dry weather over the summer in several regions and rising export demand as global economies began to recover. The bottom line was a less than robust harvest than what was projected in the July USDA WASDE report (published August 12, 2020). Further impacting the farm sector was an increase in demand for wheat, corn and soybeans reflecting the COVID-19 effect of higher consumption of dinners and baked goods at home. As we entered the fall, the crop forecasts of corn and soybean carryovers and prices changed dramatically.

USDA FORECASTS FOR 2021 CROP CARRYOVER AND COMMODITY PRICES (MILLION BUSHELS)
MONTH 2020 CORN AVG PRICE SOYBEANS AVG PRICE
JULY 2,648M $3.35 425M $8.50
AUGUST 2,756M 610M
SEPTEMBER 2,503M 460M
OCTOBER 2,167M 290M
NOVEMBER 1,702M $4.00 190M $10.40
2012/13 2015/16 2018/19 2019/20 JULY20/21 NOV20/21
CORN CARRYOVER 821M 1,737M 2,140M 2,248M 2,648M 1,702M
AVERAGE PRICE $6.89 $3.61 $3.61 $3.50 $3.35 $4.00
END STOCK/USE RATIO 89% 16% 16% 14% 11%
SOYBEAN CROP 141M 197M 909M 620M 425M 190M
AVERAGE PRICE $14.40 $8.95 $8.48 $8.55 $8.50 $10.40
END STOCK/USE RATIO 3% 7% 23% 13% 4%

Further, China demand picked up markedly as the hog herd was being rebuilt and evidence was unfolding of much tighter crop carryovers and rising commodity prices.

Consequently, the unfolding tightening of commodity supplies and rising commodity prices translated into a sharp rise in farmer optimism as the outlook for farm cash receipts/income improved. This set the stage for the recovery of farm equipment demand as fall arrived, which will likely continue well into 2021.

REVISED FORECAST: DOUBLE-DIGIT DEMAND IMPROVEMENT IN 2021

The vastly improved fundamental in the farm sector has resulted in a major turnaround in farm equipment demand in the latter part of 2020. This improvement will carry well into 2021 helped by the sharp reduction in field inventories which will have to be rebuilt over the next year.

[grid][third]2020 Forecast

NA Tractor

NA Combine

2021 Forecast

NA

[/third][third]Prior 08/20

small/med +5% to +7%
large          (-10%)

(-10%)

Prior 08/20

+3% to 5%

[/third][third]Revised 11/20

small/med +10% to +15%
large            Flat to up 5%

Flat to up 5%

Revised 11/20

+10% to +15% or more[/third][/grid]

                          

ESL Consultants is an industrial consulting firm assisting trade associations and individual companies to better understand the outlook for their end markets both domestically and worldwide. With over 30 years of economic research experience, ESL Consultants is widely recognized in the fluid power industry.

Questions?  Please contact Eli Lustgarten at eslustgarten@aol.com.

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