Ag tire market hurt by farm struggles

AKRON—Conditions for the U.S. farm sector in 2017 aren't expected to reverse the trend of declining profits in the market, a fact that will impact farm tire manufacturers.

According to U.S. Department of Agriculture economic research, net farm income fell 17.2 percent in 2016 to an estimated $66.9 billion in 2016. That is the lowest total since 2009 in both real and nominal terms, the USDA said.

According to Creighton University's Rural Mainstreet Index, weak farm commodity prices continue to hit the industry.

Livestock commodity prices fell 19 percent in the past year and grain commodity prices declined by 11.5 percent, according to Ernie Goss, Jack A. MacAllister Chair in Regional Economics at Creighton's Heider College of Business.

"The trend is sideways. Little upward or downward push," Goss said.

"Agriculture commodity prices need to rise by 18 to 22 percent for 2017 to move into an acceptable range."

He said his biggest concerns for the market are trade skirmishes, increasing value of the U.S. dollar and weakness in the Asian economy.

The continued downturn of the agricultural market affects equipment sales directly.

"Since July 2013, weakness in farm income and low agricultural commodity prices continue to restrain the sale of agricultural equipment across the region," Goss said.

"This is having a significant and negative impact on both farm equipment dealers and agricultural equipment manufacturers across the region."

In turn, the ag tire market also has seen better days.

"The trend of reduced agricultural tire demand has continued into 2016," said Christopher Durbin, manager of original equipment at BKT USA Inc. "Certain factors, such as commodity prices and changing trends, have affected how farmers redistribute their wealth. However optimistic, it appears that 2017 will show flat to little growth in demand for agricultural tires."

Laurent Le Dortz, Michelin Agricultural Tires director of marketing for agricultural and compact line product line, said a potential oil price increase could have a positive impact in the long-term period because of its impact on ethanol and corn.

He said there are some flairs of positivity noted by manufacturers, such as potential growth in aftermarket equipment.

"We have seen a slight rise in our aftermarket toward the end of 2016, and 2017 appears to be continuing the trend," said Scott Sloan, agricultural products manager for Titan International Inc.

OE market remains low

Manufacturers have battled declining OE and replacement markets for years, and project 2017 will be much of the same.

Le Dortz said the ag market was still low, with the fall in 2016 of net farm income and an OE market really depressed.

"It is anticipated that 2017 will remain low with no short recovery expected soon," he added.

The OE market continued to slide over the past four years, Durbin said. New and used inventories of farm equipment reached record levels in 2015.

"OE manufacturers have reduced new output to assist in a reduction of these inventories," he said.

"The equipment inventory levels have diminished during 2016. With reduced inventories and a need to replace equipment that has been in service for additional years, demand for new equipment has started a resurgence."

Tire manufacturers saw some steep reductions in sales during an already shaky economic climate.

Titan felt a more than 20 percent drop last year in its OE customers with $3 per bushel of corn making producers "a bit stingy" with their cash, Sloan said.

"Last year, most implement dealers were working to lower their inventory on used equipment, which was more attractive to end users," he said.

This year does not appear to be the comeback year. Sloan said that if prices continue to be stagnant, the market will remain flat.

While a hit to the OE market usually sees an increase in demand in the aftermarket, Durbin said that has not necessarily been the case.

"The end users have become more conscientious about extending the life of the tires to help reduce expenses," he said. "Aftermarket sales have also been influenced by the reduction of second-level sales of equipment. Farmers are not replacing tires as quickly to assist in the sale of their used equipment."

Equipment makers have reduced manufacturing dramatically on many of their lines to mirror current market conditions, added Tony Orlando, president, Firestone Ag, Bridgestone Americas Tire Operations.

The replacement market, however, has been impacted less. Orlando said the firm is seeing key indications of an upswing on the horizon.

Reduced commodity prices

Sloan said low commodity prices, diminishing farm wealth and excess yields have played a pivotal role in how farmers distribute their wealth. Commodity prices are expected to remain below average in 2017 after a down 2016.

"Farmers have limited their equipment upgrades and purchases to reduce their overall expenses. This means a reduction of tire purchases, unless it is absolutely required," Sloan said.

Low crop and milk prices affect net farm income and make it hard for farmers to invest, Le Dortz said. Lower grain commodity prices were at record highs from 2011 to 2013, and that impacted the industry, Orlando added.

"At the extreme, ag commodity prices do affect farmer confidence and willingness to spend on equipment, including tires," Orlando said.

"Commodity prices are trading in a fairly narrow range, and the number of U.S. farm acreage is stable. While weather in the U.S. and Latin America is always a wild card, there are several ag commodity experts who believe today's prices are at the bottom with resistance to a further decrease in the floor price.

"This should translate into higher farm income and an increase in ag tire demand. Driven by the dynamics described above, we are not seeing material growth in any one particular segment," he said.

Ongoing innovation

While the ag market faces tough times, there still is technology and innovation occurring in the industry. One such technology is in radial tire design.

"Radial tire attributes include increased sidewall flexibility for improved ground contact and better stability," said Durbin. "The trend of increased load carrying capacity has been driven by the ever-increasing size of today's farm equipment."

The increased use of increased flex and very-high flex tires help farmers to increase load capacities while not changing the air pressure requirements, he added. There is a need for higher speed tires in the market as well.

"Machinery has been developed to reduce the amount of field operation time due to weather constraints," Durbin said. "This equipment requires the need to move quickly on and in between fields. With the increase of GMO products, 'stubble resistant' technologies have been added to tires to help protect against punctures."

Low sidewall technology interest also has increased.

"I believe producers are realizing the advantages to the technology relative to their operation compared to other technologies like IF and VF to make them more productive," Sloan said.

He added that he believes the ag sector will come back; it is just a matter of when.

Small tires, strong results

One section of the market that has fared better is small dimension tires for the 40-plus horsepower tractor market.

The small horsepower tractor segment drove the 2016 OE tractor market, Le Dortz said, which was up more than 8 percent. He said the 100-plus horsepower and four-wheel-drive markets went down, 4.2 and 22.7 percent, respectively.

The influx of smaller producers may be the cause of this segment's growth.

"The increase in this market is attributed to the gain of hobby farmers, or people who have relocated to rural areas and need this machinery to maintain their property," Durbin said.

Sloan said Donald Trump's presidency also may influence the small tractor segment.

"The smaller tractor segment (less than 100 horsepower) seems strong," he said. "There is some enthusiasm in the construction market due to the election of Donald Trump and the outlook toward infrastructure projects."

While the agriculture market overall is lagging, some manufacturers believe it's coming back around.

"Agriculture equipment sales usually follow a four-year life cycle," Durbin said. "Even though the market is experiencing an elongated cycle, it appears that an uptick in agricultural tire sales is on the near horizon. Using this downtime for development and research will position BKT for a favorable future."