Poised for recovery? Farm tire outlook may be better, but high raw material prices remain an obstacle
After a several-year-long slump, the North American farm tire market appears to be on the verge of a rebound. Farm tire manufacturers are optimistic that conditions will improve, but nobody believes it will happen overnight. Raw material prices continue to escalate, more low-cost Asian products have entered the market, and tires themselves require constant tweaking to keep up with the changing demands of end users.
There are other issues as well, which top farm tire executives address in the following panel discussion. Participants include Mike Bogunia, director of sales and marketing, Firestone Agricultural Tire Co.; Olivier Gros, farm tire division marketing manager, Michelin North America Inc.; Mark Pillow, marketing director, farm tires, Goodyear Tire & Rubber Co.; and Scott Sloan, vice president of engineering and technical services, Titan International Inc.
CTD: Describe the health of the domestic farm tire market.
Bogunia: The second half of 2003 is improving but changing. Tire sizes are becoming larger to carry the loads and demands of new equipment. Larger, more powerful equipment enables customers to improve their productivity and reduce operating expenses.
Gros: We've started to see some signs of recovery. Year-to-date, there has been a slight increase in sales compared to 2002 and that is something we haven't seen over the past six years. We think we've finally reached the bottom of the farm tire market, and that 2004 should be slightly better than 2003.
Pillow: I would describe the domestic farm tire market as being weak. It appears the industry will be down for the fifth year in a row. The health of the farm tire market reflects the agricultural economy of the U.S. Historically, the farm economy is cyclical. It feels that we have been in an extended down cycle for quite some time now.
Sloan: The farm tire market is beginning to wake up. The economy is starting to make a comeback and farmers are opening their wallets a little more. Whether it is radial, bias or implements, there are positions to be had. The challenge is getting your tire onto those positions.
CTD: What is the most significant issue facing domestic farm tire manufacturers?
Bogunia: Costs. The prices of raw material and natural rubber have been steadily rising. Our raw materials depend heavily on petroleum-based products, so when the price of a gallon of gas increases it has a dramatic effect on our material costs. The cost of capital investment for new sizes and technology is staggering.
Gros: One of the major issues facing the main domestic manufacturers is that they have huge bias-ply production capacities at a time when the market is moving toward radial technology. Also, most of domestic production is focused on short-tread (R1) tires. We're seeing more and more farmers move to deep-tread tires due to their longer life and better traction and performance in wet soils.
Pillow: There are several issues. First, our segment is one that has declined in size each of the (last) five years. In fact, the total farm tire industry in North America is smaller now than it was in 1990. Second, the weakness in the ag economy continues to have a significant effect on domestic manufacturers. Farmers are not purchasing the larger horsepower tractors as frequently as they were in the past. Most (of the larger equipment) use radial tires. As a result, we have seen the OE radial farm tire business remain rather stagnant in terms of total volume.
On the replacement side, the weak ag economy has led many farmers to delay purchases of replacement farm tires for as long as possible. This is reflected in the shrinking industry numbers that I referred to earlier.
Finally, the presence of offshore Asian and Eastern European-produced bias front and rear farm tires has put a lot of downward pressure on the replacement prices of these products. In today's ag economy -- where a lot of decisions made by the farmer are largely influenced by price -- sometimes quality takes a back seat to price.
Sloan: A couple of things come to mind. The cost of natural rubber is reaching an all-time high and oil prices are very volatile. Manufacturers have had to become very creative to reduce their internal costs to produce.
Offshore manufacturers have put a great deal of pressure on domestic manufacturers to remain cost-competitive. Domestic manufacturers have many more hurdles to clear than offshore (tiremakers) when it comes to labor, environmental and government demands. The U.S. is becoming more and more difficult to manufacture in. It's not only tires. Tractors, washing machines, baseball gloves, refrigerators, you name it -- there are fewer and fewer of these products being made in the U.S. due to the inability to compete with the lower cost of offshore stuff.
CTD: How are farm tires evolving to meet the changing needs of North American farmers?
Bogunia: Almost 100% of large original equipment tractors are already radial, but the other segments of farm tires are rapidly moving toward radials. We are continually adding new sizes to our product line-up and have introduced 59 new sizes in 2003, with 31 being radial. In addition to new sizes, the load carrying capacities of tires are increasing.
Gros: Equipment manufacturers continue to increase the overall size and productivity of the machines farmers use in their operations. For example, for 2004, both Case and John Deere have introduced the two largest and most productive combines those companies have ever made. As a result, the role tires play is more important than ever. We're constantly looking for new advancements in radial design and technology that result in tires that reduce compaction and lighten the load on farmers' precious soils.
Pillow: The continuing trend on newer equipment is the utilization of radials. Radials deliver a larger footprint, enhanced footprint pressure distribution, higher load carrying capability, and better "roadability" than their bias counterparts.
Sloan: Power hop and road lope are two major complaints from farmers. They spend tens of thousands of dollars on a piece of equipment, but instead of cruising along at full throttle in road gear, they get bounced off the road at 18 to 22 mph from road lope. Or when they really get into pulling in the field, they get bounced out of the cab from power hop.
CTD: Do you import any farm tires for the domestic market?
Bogunia: FATC imports original equipment sizes that are manufactured at our overseas facilities. These sizes are usually manufactured at that facility and imported to the U.S. to support the replacement market and our dealer network for tractors coming into the country. A number of Bridgestone sizes arrive on new Kubota tractors that are only manufactured in Japan; less than 10% of these tires are imported.
Gros: We import all of our agricultural tires for the North American market from various operations based in Europe. Prior to July 2 of this year, a very small percentage of our farm tires were manufactured at our facility in Lexington, S.C. Our decision to cease manufacturing farm tires in North America is part of a larger global strategy to optimize the resources and capabilities of our manufacturing systems.
Pillow: With the exception of a few low volume radial and bias sizes, Goodyear produces all of its farm and specialty tires in one of two North American plants: Freeport, Ill., and Medicine Hat, Alberta. By far the majority of our farm tires are produced at our Freeport plant.
Sloan: We have worked very hard not to move any of our ag products offshore. Currently we do not import any ag products for the domestic market. Titan products for the domestic market are produced in Des Moines, Iowa.