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Withering in the Field: Ag Dealers Can Remain Profitable in a Down Market

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Withering in the Field

Ag Dealers Can Remain Profitable in a Down Market

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It’s late August, and for a farmer the harvest is right around the corner. But there’s a problem. The corn is a good foot shorter than it should be this time of year. Nothing can be done. The weather isn’t cooperating – both now and at the beginning of the season – and profit margins are being sliced by the day.

Sound familiar?

Substitute almost any crop in for corn, and odds are a good many agricultural tire dealers out there have heard the same lines – "It’s not going to be a good year." "We’re looking at maybe breaking even."

"The market’s so depressed."

Those phrases have been echoing through the nation’s farmland for more than a year now. And for many years before. The market’s slow, prices aren’t good and expenses are too high. The beginning of 2001 saw fuel cost spikes that plagued farmers everywhere. If the summer hasn’t been hot and steamy, there’s been little rain – or even worse, a combination of both.

Farmers have had trouble getting by, which means ag tire dealers have had trouble getting business. Farmers live hand-to-mouth, immediately pouring their profits back into the farm. But without any profits, there’s nothing to put back. Least of all into tires.

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In many ways, the ag tire dealer is just like the farmer. Profits come in and they’re dumped back into the dealership. And just like the farmer, poor crops or low prices carry a heavy toll on the ag dealer. It’s almost as though the dealer were out farming side-by-side with his customer.

State of the Field
The exact condition of the agricultural market varies, depending on which part of the country a dealer operates in and what parts of the business they cater to.

Texas and some southern regions are experiencing drought conditions. Other regions got a late start to the growing season, which has compressed the selling season.

But over the last few years, the ag market has been doing a slow downward spiral. There hasn’t been anything too dramatic – and no big trigger to set things in motion – but the market is receding slowly.

"The current agricultural market decline began in the third quarter of 1998," said Ken Weaver, national sales manager for Firestone Agricultural Tire Co. "Declining crop prices and increased production expenses, primarily in fuel and fertilizer, have really contributed.

"Corn, for example, declined from $2.50 per bushel in 1998 to as low as $1.70 in 2000. Diesel fuel and fertilizer have more than doubled in the past 19 months, forcing the farmer to work harder to control his or her operating expenses."

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Michelin North America’s ag tire group recognized a decline even earlier than that, citing a smaller market beginning in the late-1996 to early-1997 timeframe. "The consolidation of many farms and equipment leasing programs are two situations that have affected the agriculture market," said Tony Koury, director of marketing and sales.

"From the tire manufacturing perspective, the demand for tractors and farm equipment needs to catch up to supply. The overpopulation caused by leasing programs has affected the market for tractors and farm equipment."

While many see the market as having been doing a slow burn for the last two to five years, Jim Bamer, Goodyear’s sales manager for farm and specialty tires, sees a cloud with a silver lining. "The premium end of the business – the radial tire segment – is up," he said. "From a manufacturing and shipping standpoint, the industry is only slightly down."

While Bamer admits that there are pockets of dealers around the country who are suffering through a market depression, he says the majority of tire dealers he’s talked to are doing okay. "The only thing that’s going to change a dealer’s business for the better is the weather," he said.

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Whether it’s labeled a depression, a downturn or a dip in the market, something had to cause it. Often times the origination of these factors can sneak up and just pile on, one on top of the other. Firestone’s Weaver sees that not only has the crop price gone down and the expenses for a farmer increased, there has been a decrease in the demand for farm products.

Exports, in particular, have declined in recent years. Over the last four years, U.S. farm product exports dropped $10 billion dollars in total, and now sit at around $50 billion. An 11-figure decline in four years. That’s going to hurt any farmer – which in turn hurts tire dealers – no matter where they live.

"Export demand is based on the value of the dollar relative to other currencies and the level of foreign crop production," Weaver said.

"The impact of currency exchange rates on agriculture is forecast to remain negative in 2001 as the dollar remains strong despite rate cuts by the Federal Reserve.

"American farmers have received some good news on the demand side as China is currently experiencing a bad drought, which should reduce its corn production and increase its needs for imports from the U.S."

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Cyclical Futures
So tied to each other are the farmers, tire dealers and tiremakers, that all three must be watching the weather and the exchange rates with bated breath. The future of the ag market is predicted to be a little shaky, if not slow for the next six to eight months. After that? It’s anybody’s guess.

"From the manufacturing side, we’re projecting slow growth but not a depression," Bamer of Goodyear said. "Going into 2002, it’s going to be flat to slow growth and then start accelerating out. And this year isn’t that bad, so we’re still trying to sell as many tires as we can."

Historically, the agricultural market has run in three-year cycles. Crop prices go up, then production increases. Production goes up, then prices go down. Lower prices then lead to reduced production, "which is our current situation," Weaver said.

"Wheat is a good example. In 1996, wheat brought $5.60 per bushel and farmers planted 75 million acres. Prices steadily declined to a low of $2.30 per bushel in late 2000. Faced with such low returns, wheat farmers cut their planting to 61 million acres in 2001. Prices are beginning to rise with such low projected supplies, and are forecast to end the year at about $2.75 per bushel.

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"Dealers can learn about these cycles and the current state of their local farm economy from agricultural magazines and from the Internet," he offered.

Like always, dealers must adapt – learn market cycles and trends, change tactics and/or be willing to change directions entirely.

While very few tire dealers base their businesses exclusively on the ag business, they remain the integral link in the chain. "Tire manufacturers must build a strong distribution network because farmers need dependable service," said Michelin’s Koury. "The local dealer is in the prime position to provide this service."

Bamer concurs. "The tires are getting bigger and bigger and bigger," he said. "The servicing dealer has to have bigger equipment and better-trained employees. Handling and changing ag tires is getting to be more of an art form than in years past. The large, good dealers are telling us they’re increasing their service area to handle that kind of business, where the mom and pop locations can’t do that."

Increasing service in one way for dealers to gain marketshare and add profit dollars. Another is to improve their product mix and sell more in the premium tire areas.

"There’s a lot of new tire sizes and types being brought out now," Bamer said. "When the farmer makes those adjustments, he’s got to buy new wheels to go with those tires, which is a high-profit item. Good dealers will be find the sales, and the borderline dealers will struggle."

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Streamlining the farmer’s business is something that every tire dealer has to strive to do. Improving productivity and reducing expenses needs to be done in order for all parties to succeed. Performance in the field and the office is critical.

"Tires are a key component in tractor performance. They affect fuel consumption, drawbar pull and the time required to complete field work," Firestone’s Weaver said.

"As farms continue to grow larger, the equipment used grows more sophisticated and more powerful to allow the farmer to complete more work in less time.

"Horsepower in four-wheel drive tractors, for example, has roughly doubled in the past 15 years, with large machines today operating at over 400-horsepower. This requires us to produce tires that will capture the tractor’s high horsepower and translate that into traction in the field while operating at low air pressures to minimize soil compaction," he said.

"Tire dealers who invest in service equipment and technician training will have the advantage in selling tires and services to a more sophisticated farmer who has invested in new, more efficient agricultural equipment."

Getting Help
Any dealer mired in a depressed market wants help – needs help. They’re looking for advice, information, tactics, price breaks – whatever it takes to get through. More often than not, the dealer turns to the manufacturer for answers.

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The advice can be anything from suggestions he exploit a niche market in the local area to being more diversified in case one facet of the business goes south. Both ideas can work, it’s simply up to the dealer to make it happen.

"There are many niche markets that use agricultural tires in various applications," Koury said. "Operations like interstate and highway grass cutting, and road and building construction sites. These markets can move agricultural tire dealers beyond the farm for their businesses."

Servicing grass-cutting operations is an example of thinking outside the box. Another is to focus on what you already do well – deliver better quality, more service. Simply take what put the dealership on the map and magnify those things.

Even in the down-and-occasionally-up farm market, there are many ways to squeeze a few more drops of juice.

"We advise our dealers to focus on the total value of their tire and service program to the farmer. The successful dealer provides application advice, customer-friendly warranty handling, and reliable field service, in addition to a fair price," Weaver said. "Marketing farm tires requires a significant investment in inventory and service support and should generate gross margins sufficient to return a profit to the dealer.

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"By focusing only on price, a dealer can limit his profit," he said. "We provide training to our dealers to help them become farm tire experts and to better market their expertise and overall farm programs."

Goodyear’s Bamer has a suggestion to keep in mind: farmers in a down economy won’t be looking to spend a lot of money. That means no new equipment, which means that the older stuff will have to be serviced and upgraded.

"When a farmer isn’t going to buy a new vehicle, they’ll be looking to refurbish their older ones," he said. "They become more cautious, so they buy new tires instead of a new vehicle. When breaking even is a daily struggle, farmers become more conservative.

"For dealers, things will get better. These things cycle out. Demand will outpace supply at some point. We just need a few breaks and the market will immediately react. From a dealer standpoint, they’ve got to work harder. The business is out there, but it’s more competitive at the moment."

Tracking Technology
One of the newest trends in agricultural tire technology is the use of rubber tracks instead of tires on high-horsepower farm equipment. According to Caterpillar, 45% of all new 350-horsepower tractors now run on tracks, and one-third of its 220- to 350-horsepower tractors have them, as well.

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Firestone acknowledges that there is a market for rubber tracks, but doesn’t see them catching on nearly as much as or as fast as Caterpillar does.

"Tracks have found a market in certain applications and parts of the country. We estimate that tracks will be used by 10-15% of high-horsepower tractors in the future," Weaver said. "Tire dealers will be faced with the decision on whether to make the investment in rubber track sales and service."

That’s the big question. Rubber tracks do offer an advantage over tires in certain soil and equipment conditions. They deliver more power in soft soil, and also have a wider footprint with less soil compaction. Plus, fitting high-horsepower equipment with tracks can reduce the power hop that happens when the load in a radial tire springs, causing the tractor to jump or "hop."

But tracks haven’t established themselves solidly in the market yet. For a dealer to handle them, it would take a huge investment in both equipment and training.

"The current state of the replacement market is that the Case and John Deere dealers are taking care of the tracks as though it was a vehicle part," said Goodyear’s Bamer. "There are hundreds of parts involved and it’s easy to ruin the track.

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"Our vision is that Goodyear dealers will be able to handle replacement needs eventually. We need good dealers who are well-trained and have the equipment necessary, and we’re heading that way.

"We think there is a major future for tracks. We’re a supplier to both Deere and Case and we see that business growing as the size of the equipment grows. There are trade-offs between tires and tracks, and it comes down to what the farmer wants. For a guy who’s got a flat farm, the tracks are great for him. A farmer who’s into narrow-row farming may find tires give him more flexibility," he said.

It will take a dealer with vision, and the "the more progressive dealers will see the business opportunity," Koury said. It will also take financial resources and a drive to make the track business work. It’s not out of the realm of possibility, but the average dealer isn’t going to be jumping on board quite yet.

Outside of rubber tracks, there are other technologies that will improve the agricultural tire market. Tiremakers are looking at everything from lower profile radials to simply rounder tires to global positioning.

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Firestone is working outside the tire box, focusing on using satellites to create GPS-based "precision farming" systems. "These systems can allow a farmer to monitor, understand and manage crop yield on various parts of the farm," Weaver said. "It allows them to precisely control seed, fertilizer and herbicide distribution, which can lower production costs and help the environment."

Michelin is working on the low-profile radial XM108 to handle the extra weight of heavier equipment. According to the company, the XM108 will give a much bigger footprint producing 20% lower ground pressure, while being able to carry "significantly heavier" loads. The tire’s lug pattern and low pressure capability are also designed to improve comfort and handling.

Goodyear is interested in making sure its tires handle better on roads. "Right now we’re working on tire uniformity to make sure tires are rounder and ride smoother, because now tractors are running 40-50 mph down a road between fields," Bamer said. "We’re developing tires now that will be adaptive for that purpose.

"Currently the tire is like a shock absorber, and that’s going to change. We’re improving the materials, improving the production process. The direction used to be simply bringing in new lines of tires. Now we’re improving the lines we have."

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The improvements will come. And so will positive shifts in the weather and the farm economy. It’s all a matter of time, and the smart ag tire dealer will have to time it just right to maximize his success.

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