Ag tire market growing despite uncertainties

Farmers may be reluctant to spend money this year, amid uncertainty about the U.S. economy—including low commodity prices and high production expenses—and concerns about the results of the pending November elections, yet some ag tire makers are upbeat about the year ahead.

Agriculture tires account for about two-fifths of the North American OTR sales but they are expected to have the best growth rate in the next five years, according to the Smithers Group, a research and tire testing company.

After generating $2.6 billion in sales in 2023, the ag tire segment is predicted to grow at a compounded annual growth rate of 3.2 percent to $3.2 billion by 2029, Smithers said.

"I honestly think that this year will be a little bit better than last year for both (OE and replacement tires)," Bruce Besancon, vice president of marketing, Yokohama Off-Highway Tires America Inc. (YOHTA), said.

"I think OE might be iffy, but let's see what happens. I think a big part of it being in the second half. I think we have to wait and see how some of these logistics issues pan out."

The tire industry has been hit with increased shipping expenses and delays due to attacks on cargo ships in the Red Sea heading toward the Suez Canal, forcing some ships to take the longer and more costly route around the southern tip of Africa to Europe and the western hemisphere.

Ironically, in some cases, the delays in tire shipments have helped alleviate the high inventories that dampened aftermarket sales last year.

"(2023) was a bit of a reset year. ...," Besancon said.

"We had had so many things happening, you know, with various shipping issues, and, let's not forget, a couple of years earlier, we had shortages. Everybody caught up, and I think last year was really, particularly with the dealers and distributors, making sure they had the right inventory levels.

"We've gone through numerous crazy freight rates, things like that. And we thought we were getting to a period of normalization, and we did for about six months. And then everybody was like, 'OK, now let's make sure that we're looking at all our inventory levels and making sure we're set at the right level.' And so with that, we saw a little bit of a dip in business, which is why I call it a reset."

Chris Rhoades, BKT USA Inc.'s vice president for the medium and large OTR sector, tracked the high inventories back to shortages during the COVID pandemic.

"We had solid production shipments the whole time, both in ag and MTR. So we were constantly filling all the orders and keeping everything in stock. Other manufacturers, due to COVID, had pulled back production. And what happened is at the end of 2022, and even before that, all of a sudden, all of those orders hit the dealers from multiple manufacturers. So all of a sudden it was, you know, famine, famine, famine and then just overfilled. So we tried to approach it differently, even to our own cost," he said.

"Something similar happened where the first four months (2023) were very slow because of the high-priced inventory with all the dealers and distributors," added Minoo Mehta, managing director of BKT USA.

"And it took time to stabilize the freight rates coming down every month. Pricing was the most important thing, which made the people a little nervous about buying new products because they didn't know where it would stabilize, But they did buy whatever was necessary. But after June, things started picking up, and we recovered all the lost sales of the first four months," Mehta said.

Besancon noted just as most tire factories caught up with demand, the industry was impacted by the Red Sea shipping disruptions.

"So that kind of put a little bit of a damper on some things and created another little bit of a logistics hiccup," Besancon said.

"If you believe in God, God doesn't want the tire industry to go smoothly," Mehta joked.

"Overall, the market last year was tough due to a lot of our dealers starting out with excess of inventories. So many of our largest dealers were going through inventory reduction programs," he said.

While the Canadian market was booming, according to Ryan Loethen, president of CEAT Specialty Tire Inc., "the U.S. was a bit mixed. I think what we saw in the U.S. is kind of a mixture of uncertainty about the economy, and people not wanting to go out and invest, for sure. There was a glut of tires in the market.

"So it was, I wouldn't say necessarily it was a down year. We experienced growth, but not at the same rate we had in 2021 or 2022."

He noted that in the past, small and regional tire dealerships would maintain a stock of tires due to scarcity.

"I didn't see that last year. I saw them relying on the wholesalers and wanting the wholesalers to maintain inventory, and they take (tires) just-in-time. ... So for all the wholesalers, inventory really crept up, while the regional tire retail guys, the guys that bolt on, their inventory went significantly down because they were relying on that just-in-time from the wholesalers.

"Well, in this market, when there's a glut, that was possible to do it last year. (This) year, I don't think that's going to be quite possible based on what I've seen, at least in the winds at least," Loethen said.

The U.S. Department of Agriculture (USDA) is forecasting a continued downturn in farmer income in 2024 after reaching record highs in 2022.

Net farm income, a broad measure of profits, reached $185.5 billion in 2022, before decreasing 16 percent to a forecasted $155.9 billion in 2023. Net farm income in 2024 is expected to drop 25.5 percent to $116.1 billion. (When adjusted for inflation, net farm income is forecast to decrease 27.1 percent in 2024).

Lower commodity prices, lower direct government payments and higher production expenses will contribute to the decline, according to the USDA.

This forecast comes as most farm equipment sales decreased in 2023, compared with 2022, according to the Association of Equipment Manufacturers (AEM).

While combine harvester sales closed out 2023 ahead of 2022 levels, total U.S. farm tractor sales fell 8.7 percent, compared with the previous year.

Sales of 100+ hp tractors grew 5.2 percent for the year, while combine harvesters edged up 1.7 percent.

In Canada, 4WD farm tractor sales surged 44.4 percent for the year, and combine harvester sales increased 5.5 percent, but overall unit tractor sales finished down 10.7 percent.

"I think the farmers are very astute, and that is why they're holding on to cash," Loethen said. "Because there's uncertainty, and uncertainty in the market for awhile, and they wouldn't be in the position, when everything breaks loose, to do what they need to do.

"And they also look at it as it's also their family's legacy. So they also want to keep cash to ensure that there's something, whatever happened, they can protect that legacy as well. So it's an important part of knowing when you're working with the farmer in the United States. I think that's why they're more conservative than they are in Canada."

Besancon said farmers are being smarter about how they spend their money.

"We do see a trend on them moving and spending more on technology. You know, technology seems to be increasing and making people smarter. And I think that the smarter that everybody gets, and particularly our farmers, because everything's always gonna be about productivity—doing more for less, doing more most efficiently. And that goes for whatever work that you're doing in our world. And I think that's kind of a focus.

"But we did get hit with pretty high inflation last year and some other things so that takes a little bit and instead of replacing something, they might wait just a little bit longer to replace. And again, I think that goes also into the inventory question," Besancon said.

CEAT's Loethen predicts with farmers' holding on to cash, and perhaps delaying the purchase of new equipment, it could be good news for Tier 2 and Tier 3 tire brands in the aftermarket.

"Now we're gonna get, I guess, more people who would have bought what they consider a tier one tire and pay more money for, say: 'Let me look at the performance of this so-called Tier 2 and Tier 3 tire.' And when they realize, 'Wow, the performance is very much the same, but I'm paying half the price (of a tier one tire),' it is going to help some of the lower tier tires to really bust into the top-tier market," he said.

Loethen expects increased aftermarket sales for 2024, based on the first two months of the year in which CEAT's sales doubled the year-ago period.

"We're growing by leaps and bounds in Canada," he added.

"The ongoing consolidation and move toward mega farms is driving the increased use of heavier machinery and equipment, combined with more sustainable farming techniques," said Ciaran Little, vice president of the Americas and Asia Pacific information division at Smithers.

Heavy equipment use is pushing demand for increased flexion (IF) and very high flexion (VF) radial tires.

He noted the drive toward minimizing soil compaction "is actively driving changes in tire technology."

Little called it a key issue in the agricultural sector as IF and VF tires are becoming an increasingly common sight on large farms, offering same-load capacity with a reduction in air pressure, which increases the contact area of the tire and reduces soil compaction.

VF tire technology is a technology that younger farmers are embracing with a better understanding then maybe their elders, according to YOHTA's Besancon.

"Whereas before we were selling the very high flexion tires and the farmers may or may not have known how to utilize it. ... Do they really know how to utilize to the maximum capability of what they have on their machine that came OE or whatever?" asked Besancon.

"But we're seeing more and more people utilizing that. They're utilizing with TPMS-type systems as well as just setting the levels of pressure at the correct level. ... So you can say more and more farmers are using it. They're really understanding it, understanding it and getting smarter," he said.

"I can tell you that VF technology is definitely coming to the U.S. more than Europe. ... We'll definitely see an impact of it coming and (farms) moving towards that a lot. That's the biggest trend in agriculture," Mehta said.

He added that another trend is the production of larger, heavier farm equipment that require larger tires.

"Quality and technology both will have lot of importance going forward," Mehta said.

But the cost of larger equipment may prompt some farmers to continue using their older vehicles.

"IA lot of people, rather than investing in a new machine, are still working on their existing machines but now spending on technology, to see how much they can go up on productivity and not invest that high amount on machines," added Dhananjay Bisht, product manager for construction off highway for YOHTA.

"That kind of explains a bit of the demand on the OE side versus aftermarket, where in the aftermarket we see the uptrend."

There is a trend toward greater radialization in the U.S. small ag tire replacement segment, according to Smithers.

BKT's Mehta believes that will cause the eventual demise of bias-ply ag tires. But YOHTA's Besancon countered that bias-ply tires are here to stay, at least for smaller farm equipment.

"It's not going to go away because there are applications. The thing that we always must keep in mind, both as a manufacturer and as a user, is what is the most efficient and effective product that should go on a machine? And that's what we've got to concentrate on, not what technology we want to push," he said.

"What's the most efficient option that can go on that machine? And in some cases, in many cases, it's radial. In many other cases it's a bias. And in some cases, it's a solid. We have to be willing to do all those, and as a company we are and we're not shying away from any of that," Besancon said.

"I see the highest growth in premium bias still," CEAT's Loethen said, attributing the demand to small farms using small or medium-sized tractors.

"I think the VF market's an important market and we definitely play in that market. We have great tires in that market. We also have great tires in the premium bias line, which I think is a neglected segment of the U.S. ... I just think that's a huge neglected market that I think a lot of people overlook."

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