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Partner in Growth: Focus on Cost Reduction, Service to Squeeze Profits Out of Ag Tire Market

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The last two years set records in the agricultural history book. Unprecedented farm income growth, high commodity prices and unrelenting production demands in 2004 and 2005 resulted in strong equipment sales. And, those strong farm implement sales boosted the ag tire replacement market.

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But, the pendulum, now, is swinging the other way.

According to the Economic Research Service (ERS) arm of the U.S. Department of Agriculture, net farm income will fall $16.4 billion from 2005 levels to $56.2 billion this year.

This bottom-line erosion is being caused by higher-than-average and steadily increasing production costs. The ERS projects that total farm production expenses will rise 3.7% this year, due to the higher cost of fuel as well as fertilizer, which is manufactured using natural gas. Even seed is more expensive this year due to higher transportation costs.

“The rise in fuel costs has finally taken its toll in terms of [farmers’] cost structures,” says Bill Schafer, vice president of marketing and sales for the agricultural division of Michelin North America (MNA). “It’s squeezing their bottom lines.”

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At the same time, government subsidy payments will decline $4.5 billion, while interest rates on loans and labor costs continue their upward climb, according to the ERS.

Additional economic factors are further reducing income for U.S. farmers. Over the last three years, corn harvests, for example, surpassed those of all other comparable periods in history, states the ERS. Yields, exceptionally high, had a negative effect on market prices. It’s Economy 101: High corn supply resulted in lower prices, which reduced cash receipts for farmers.

Corn is just one example. The government agency expects all farm types to experience reduced income this year, stemming from a combination of the aforementioned factors. Dry weather conditions, especially in the Midwest, also reduced this year’s farm income.

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It’s easy to see, then, why ag tire sales are down industry wide, at least compared to the previous two years. And, experts don’t expect relief anytime soon. “We do not believe the market, even in 2007, will return to what it was in 2004 and 2005,” Schafer says.

“Farmers are much more cautious this year with regard to the money they invest in new equipment and replacing tires,” says Schafer. “When a farmer does invest, he needs to get more out of that investment now than in years past.”

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Interestingly, though, the same high energy costs that are thinning agricultural margins may also have an indirect – and positive – impact. The soaring price of fuel is driving increased demand for the biofuel ethanol, which is manufactured from corn. Long term, demand for ethanol could be a boon to corn producers. On the other hand, setting aside more tillable acres for corn production would likely be done at the expense of other crops, such as soybeans and wheat. Still, it’s a trend that deserves an ag tire dealer’s watchful eye.

Right now, though, we must focus on the present state of the industry and address what dealers can do to maintain profitability in an uncertain agricultural market.

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Blood From a Turnip?

Sure, the ag tire market appears infertile at first glance. But a deeper look – and some strategic thinking – can uncover a wellspring of profit opportunities for ag tire dealers.

Take the move towards radials, which has been occurring in the ag tire segment for several years. Increased production costs only exacerbate the radialization trend. Advantages of radial over bias include longer life, better traction and an overall reduction in soil compaction due to a larger footprint – all desirable tire characteristics for a cost-conscious customer.

Though the ag tire market is still 60% to 70% bias, Schafer sees the market slowly radializing, and MNA is seizing that opportunity. “We are developing and marketing radial products to help farmers decrease costs and increase productivity, even in an overall down market,” Schafer says. “The trend towards radialization might grow more quickly over the next few years than we’ve seen in the last few.”

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Jeff Wilson, marketing manager for the Firestone Agricultural Tire division of Bridgestone/Firestone North American Tire (BFNAT), agrees. “Continued radialization should help, profit wise,” he says. “Radials offer more load-carrying capacity and lower inflation pressures that can help reduce soil compaction.”

Still, a dealer needs to know its local market to stock the appropriate inventory, Wilson adds, because some regional markets have been slower to radialize than others.

In the Field

As the farm market swings downward, cost savings become more critical, and minimizing downtime becomes more important. Ag tire dealers that recognize this reality and adapt to it are likely to be successful.

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“Farmers want a long-wearing, dependable tire that will keep them in the field,” says Jeff Vasichek, vice president of sales and marketing at Titan International Inc. “The tire dealer that wins will be the one that out-services all others.”

That’s why it’s so important for ag tire dealers to offer 24-hour field service and dedicated ag tire service personnel, Vasichek says. “When a farmer has a flat tire, he is down. Servicing dealers get them up and running with minimal downtime, which is lost money.” His advice: “Offer the best quality tire and all of the tools to go along with it. When you have that combination of tires and service, you win.”

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About the value of service, there’s little dissent. “Farmers look to dealers to get a tire recommendation,” says Wilson.

“Dealers should get as close as possible to farmers to understand their needs.” Fast, in-field service is critical, Wilson explains, not only to reduce downtime but also to maintain an intimate relationship with farm customers. Knowing their operations, applications, soil conditions and priorities allows dealers to sell the most appropriate tire and, in turn, delight the customer.

“Dealers need to have dedicated individuals out visiting farmers to inspect their tires, make recommendations on new tires and then ensure they are properly serviced,” agrees Schafer.

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Knowledge Transfer

Another way for ag tire dealers to profit in the current down market is by sharing their knowledge of tires with struggling farmers. “Help farmers understand the impact that tires can have on their bottom lines,” Schafer says. In other words, teach them how to cut costs and increase productivity by following a strategic tire replacement and maintenance program.

Air pressure, for example, is a delicate art in the ag tire market. “Air pressure has to be adequate to ensure good traction and longevity, but it also has a direct impact on soil compaction,” Schafer explains. “Higher inflation means greater compaction. The proper pressure will better distribute the load and decrease compaction on the soil.”

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Easier said than done. Dealers must consider a range of variables – such as load and soil conditions and time spent in the field and on the road – before they can recommend the “proper” inflation.

Vasichek says a number of Titan dealers have offered farm tire workshops to ag tire customers. These workshops cover tire care, maintenance and inflation and help farmers reduce their costs through tire management programs. And, educating customers – not just selling to them – can create profitable relationships that last for years.

“The ag tire buyer is a complete customer,” Vasichek says. “Even in down markets, farmers still have to buy tires. They still have to be out in the field and have tires serviced.”

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Keep in mind, too, that ag tire customers also have cars, light trucks, compact tractors and even skid-steer loaders that can provide additional sales opportunities for multi-segment dealers.

“Some farmers see tires as a cost, but, with the right type of tire and air pressure maintenance, they can decrease costs and improve productivity,” says Schafer.

All they need is a good tire dealer to show them the way.

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