Cash crop: American ag tire dealers are seeing green as global economy helps send crop prices soaring

Dec. 1, 2007

Government-imposed price controls in Russia. Drought conditions in Australia. Below-average crop production in Bangladesh. These nations may be half of a world away, but what’s happening in their fields and inside their government offices is having a positive impact on crop prices in the United States. And high crop prices mean farmers have more money to spend on equipment, including tires.

Commodity prices in the U.S. reached sky-high levels during 2007. Corn prices hit $3.29 per bushel this past October, 74 cents more than during October 2006. That same month, soybean prices reached $8.58 per bushel, a $3 increase over previous-year levels. Two months ago, hay was selling for $133 per ton, up nearly $25 from October of last year.

“The climates that support high-production agriculture don’t exist everywhere,” says Bill Haney, east region sales manager, agricultural and forestry tires, for Trelleborg Wheel Systems.

World wheat stocks, for instance, are expected to fall to their lowest level since 1982, according to the United Nations Food & Agriculture Organization. Nations suffering from food deficits are expected to import record amounts of food this year.


Against this backdrop, American farmers are doing their best to maximize supply. The U.S. Department of Agriculture says a record 13.1 billion bushels of corn will be harvested in 2007 alone.

Combine the productivity of the American farmer and adverse conditions in other parts of the world with heavy demand for Western foods in industrializing countries like China -- plus the rapid evolution of crop-based industries like bio-diesel and ethanol -- and the U.S. farm economy is on track to achieve record income levels of $87 billion this year.

That’s $28 billion more than 2006 and nearly $30 billion above the segment’s 10-year average. The net result is a scenario in which farmers -- as well as farm tire dealers-- are seeing plenty of green.

Ripple effect

“Any kind of activity in a large growing area, especially an adverse one, is going to affect a single commodity somewhere down the line,” says Ken Allen, executive director of sales and marketing for Firestone Agricultural Tire Co. (FATC).

“We’ve seen this for years when we look at bean plantings in Brazil and corn plantings in Argentina… what their growing conditions and currencies are, and how we in America -- on the world market -- have to compete.”

Economic fluctuations don’t just impact crop prices. They also have the ability to alter the flow of tire shipments, says Jeff Vasichek, vice president of sales and marketing for Titan International Inc.

“If you go back to 2004, Brazil has been hot and Europe has been hot. Both of those markets are seeing huge demand at OE and replacement. Brazil alone figures its agricultural output next year will be between 30% and 40% above 2007.

“It’s starting to affect us here. We already have inquiries for tires from Brazil.”

Two years ago, more units were being sent to OE than replacement, according to Haney, which created shortages in some sizes both domestically and abroad. He expects the imbalance to correct itself.

“The cycles don’t last as long. Traditionally, the old cycle was seven years. Right now it’s been shortened because of the global economy. But you don’t just flip a switch and start making farm tires. It takes a lot of planning, equipment and investment.”


Up cycle

Kelly Monthei has been selling farm tires for years. He’s familiar with the peaks and valleys that mark the cyclical farm economy.

“Last year was pretty flat, but when grain prices took off this spring, we saw our business take off along with it,” says Monthei, who manages Graham Tire Co.’s Worthington, Minn., location. (Graham Tire, which is based in Sioux Falls, S.D., sells Goodyear and Titan brand farm tires out of 18 locations throughout the Upper Plains region.)

As a whole, Monthei says his company’s farm tire business is up 30% to 40% over 2006 levels. “We’re having a great year. Part of that is due to the wet fall we’ve had, but grain prices also are high. We have a lot of ethanol and soy processing facilities in our area.”

Farmers are making money and spending it, he says. A large percentage of Monthei’s farm tire customers are investing part of their windfall in new equipment, including tractors.

Troy Kind, manager at RDO Equipment Co.’s store in Hawley, Minn., says his outlet’s four-wheel-drive and row crop tractor sales are up. “Farmers have more income to spend.”

Figures from equipment manufacturers like Deere & Co. reflect the booming farm economy. Deere posted record earnings of $537 million during the third quarter.

Deere spokesman Barry Nelson says ethanol production has been the biggest driver in the farm economy’s prosperity. “Producers can actually make money selling corn. If they’re in a good position with income, a lot of farmers are going to improve their equipment fleets.”

“The OEMs do not build a machine unless it’s been sold,” says Vasichek. “Even the guys who make grain augers are expecting a record year.”

Allen reports some equipment manufacturers have told him they’re expecting a 10% to 20% sales improvement in 2008. “One manufacturer has said (his company) expects a good run for the next three to four years.”

Farmers are gravitating toward high-horsepower tractors, says Bill Schafer, vice president of marketing and sales for Michelin North America Inc.’s farm tire business. “We saw a drop-off of high-horsepower equipment in 2006. In 2007, we’ve seen almost the opposite. And in 2008, (high-horsepower sales) will boom.”


Close to the customer

Mark Carpenter, owner of Jerry’s Tire & Auto Service Inc., a three-store dealership based in Lake Odessa, Mich., says high crop prices have been good for business. “I think farmers are a lot more proactive. They’ve had small returns on commodities for many, many years.”

At the same time, farmers in his market aren’t spending themselves dry. “It isn’t like they’re putting on eight new tires at will. They’re still cautious about how they spend their money. But whereas two or three years ago, if a tire went flat they’d fix it, now if a tire goes flat, they will come in and replace it.”

In addition to regular retail tire sales, Carpenter hopes to snare replacement sales when leased tractors and other machines are traded in at equipment dealerships.

Ty Bishop, owner of Bishop Tire Inc. in Orrville, Ohio, says his farm tire sales are up 50% over last year. Bishop Tire is selling 30 to 50 tractor and implement tires per week.

Many of his farm tire customers have put off tire replacement “for years. They’re at the point where they have to do it.” Having extra money in their pockets makes the choice easier.

“Farmers have had a good year,” says Nick Phillippi, general manager of Nebraskaland/Kansasland Tire, which sells Goodyear and Titan farm tires at 22 locations throughout Nebraska, Kansas and Oklahoma. “They don’t get that very often, so this is a time to invest in their operations. I think we will have all of 2008 and maybe 2009 before we start to see (the farm economy) go back the other way.”

“It’s always important for dealers to understand the pulse of the market so they can anticipate needs,” says FATC’s Allen. “In production agriculture, the most successful companies have the ability to satisfy the needs of the (farmer) in his critical window of opportunity, whether it be the planting season, the application season or the harvesting season.

“It’s important to be connected. With some of these large radial tires, we’re getting to the point where a set is equivalent in price to the overhaul of an engine. Preventive care and anticipating customers’ future needs is more and more important.”

Titan’s Vasichek agrees. “The successful tire dealer is the one who’s closest to the end user and can go out and service tires as quickly as possible. Downtime is a huge cost.”

As 2008 approaches, the weak U.S. dollar means farmers will be able to command more money for crop exports, according to Michelin’s Schafer. “Opportunities for dealers to quickly grow their business during the spring planting season will be strong.”

Dealers should stock up on tires, he says. “He who will have product will be able to take advantage of these opportunities.”


Farm tire technology: the next big thing: For starters, expect taller, narrower tires

Changes in farm tire technology are often more subtle than changes in other segments like consumer and medium truck tires, but they’re just as driven by application. What’s the next big thing in farm tire technology?

“What I see is tires becoming much more specialized,” says Jeff Vasichek, vice president of sales and marketing for Titan International Inc. “They’re going to become taller, narrower… for example, for four-wheel-drive tractors, they will more than likely become taller and will carry heavier loads at less air pressure. Row crop tires will become taller and will be required to travel at higher speeds.”

“We’re seeing growth in more sophisticated tires… for example, wide tires, flotation tires,” says Shaul Nuri, marketing manager for Alliance Tire USA.

“Productivity is the key,” says Ken Allen, executive director of sales and marketing for Firestone Agricultural Tire Co. “Going forward, we always have to look backwards. What have we already done (to improve) productivity? We went from bias ply to radial ply. I would expect as we continue to focus on productivity, it will be advancements in radial tires, whether it be tread designs or other things.”

Increased investment: Trelleborg wants to add farm tire retailers

Swedish farm tire manufacturer Trelleborg Wheel Systems wants to ramp up its market penetration in the United States by building a network of independent farm tire dealers and boosting its presence at farm equipment dealerships.

“Today our current program is we sell through distributors who then re-distribute (the product) into the marketplace,” says Jeff Jankowski, director of sales, agricultural and forestry tires, for Trelleborg’s U.S. operations.

Jankowski says Trelleborg will maintain its distributor base but wants to sign retailers “whose core business is selling and servicing ag tires to the farming community.” Trelleborg is looking at creating five sales regions.

“We’re going to hire new salespeople (in order) to get to these independent dealers and equipment dealers.”