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Machinery Pete: Bite the bullet and buy now

I got a call this afternoon from Mark, a faithful "Machinery Pete" reader from Kansas, just north of Wichita. Mark posed a very interesting question to me:

"Pete, I'm sort of looking to buy a 150 horsepower range tractor, something like a John Deere 7800, 7810, or maybe an 8100 or 8110. Do you think I'd be better off looking to buy right now, or should I wait it out a bit?"

Mark's a smart guy. He senses used equipment values are very, very strong right now. As I mentioned before, he's a faithful "Machinery Pete" reader so he has seen the litany of high auction sale prices I roll out here each week online and each month in print in Successful Farming magazine.

What he's really wondering is this: Will used equipment values rise even higher than they are now?

Yes, I think they will and I told Mark why it may make sense to begin looking in earnest for that tractor he's after. Wait around a few months and you're liable to find used equipment values have gone up another five to 10%.

I don't claim to be clairvoyant, I'm just callin' 'em like I see them. Here's what I see right now:

  • On Wednesday, September 26, I read on Agriculture Online that U.S. grain markets surged, sending wheat, soybean and corn prices markedly higher.
  • Healthy commodity prices will act to further reduce the already scarce market for farm machinery auctions. I've documented in this column before how drastically the number of auctions has fallen: Down 32.9% the first quarter of 2007 versus 2006; down 50.6% first quarter 2007 versus five years back in 2002. Healthy grain prices will work to make guys hang in there one or two more years before hanging them up and selling off their equipment line via auction. More farmers with more money will be chasing less available used equipment. Auction sale prices on low-houred tractors from five to 25 years old will continue to rise.
  • I read a report last week from a Wall Street firm that speculated the price of steel could go up 25% by the end of 2008. Hmmm, remember what happened to used equipment values the last time steel shot up in value, back in 2004? I remember. Vividly. Auction sale prices went nuts. Nuts higher that is. Higher steel costs = higher price of new equipment = more folks turning to late-model high quality used equipment.

Do you see the tea leaves I'm reading?

Now let's get specifically to the timing issue. As I've said for years, auction sale prices historically tend to trend to higher from around Thanksgiving Day through February. Lots of year-end tax buyers help pushing the market, especially with the newer tax laws allowing accelerated depreciation on purchases. Last year, however, the used equipment was so hot that I didn't really see a drop off in sale prices once March, April and May rolled around.

I think we'll the same thing in '08. Used values could be poised to rise even higher.

Okay, I told you what I see coming, but now for the kicker…given this environment of rising used equipment values, it will become more important than ever to stay on top of current values. Here's an example for you, a little study I posted on our www.machinerypete.com Web site last week. I crunched our auction sale price data on JD 4230 tractors, the 100 horsepower range model Deere made from 1973-1977. 30-plus years old, they gotta be dropping in value, right?

Nope.

Actually JD 4230 tractors are selling for 18.8% more at auction this year over last year. Average sale price in 2007 = $14,220, vs. average auction sale price last year of $11,974. Like I've been saying, used equipment values are rising.

But get this, that average auction sale price of $14,220 is basically the same as the average dealer advertised price so far this, which our data shows to be $14,275. Now there's a scoop for you...JD 4230 tractors selling at auction for the same money dealers have them listed for on their lots.

Even implement dealers need to keep a closer eye on rising used values it seems.

Back to my friend Mark from Kansas...he further wondered how New Holland 150 horsepower tractors compared value-wise to Deere. He's on the right track, asking questions, looking to find current values, comparing and studying all the angles, maybe even looking for geographic areas where prices are a bit softer, or at least not as red hot.

In wrapping up, I think back to the old TV commercials for Fram oil filters. The mechanic slides out from underneath the car he's working on, "You can pay me now, or you can pay me later."

But expect to pay more for that nice used tractor if you wait and pay later.

I got a call this afternoon from Mark, a faithful "Machinery Pete" reader from Kansas, just north of Wichita. Mark posed a very interesting question to me:

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