What Does the Federal Reserve’s Interest Rate Cuts Mean for Ag Equipment?

2024 is shaping up to be a challenging year, marked by high interest rates, low commodity prices, and geopolitical instability, all of which have created an atmosphere of uncertainty. Farmers are hesitant to invest in new equipment due to high costs and rising interest rates. Additionally, the market for used equipment is in decline, leaving many farmers to watch the value of their machinery decrease.

In response to economic conditions, the Federal Reserve took action at its September meeting, cutting the primary interest rate by half a percentage point, bringing it down to a range of 4.75% to 5%. Fed Chair Jerome Powell highlighted the growing confidence in the labor market and a belief that inflation is on a sustainable downward path. Projections suggest that the federal funds rate could fall to 4.4% by December and 3.4% by the end of 2025.

Lower interest rates are undoubtedly good news for the agriculture sector. Reduced rates mean less pressure on operating lines of credit, allowing farmers to focus on operational upgrades, building investments, and equipment purchases. However, despite these rate cuts, equipment sales remain sluggish, with dealerships offering attractive financing options, such as 24-month interest waivers or rates as low as 1.9% for 60 months. Some manufacturers even offer 0% financing for 24 to 36 months on used equipment, yet equipment is still sitting on dealer lots. This raises the question: If financing is cheap, why aren’t buyers jumping in?

Used machine values

One of the critical factors behind this hesitancy is the current state of used machine values. The drop in equipment prices has been sharp, with each auction setting new lows. Although the pace of this decline has slowed in recent months, the end-of-year auction cycle could reveal a new low point, affecting both dealers' inventories and the machinery farmers already own. As equipment values fall, the cost of upgrading machinery rises, leading to larger down payments and increased financing requirements.

Despite the anticipated decline in interest rates, used equipment prices are expected to stabilize. There could be a slight uptick in demand as financing becomes more affordable.

By 2026, the market may resemble what we saw in 2018 — a “new normal” with plenty of machinery available, but at more stabilized prices. To drive equipment purchases, interest rates will need to fall within the 4% to 6% range, providing buyers with the opportunity to maintain equity in their machinery while keeping payments manageable.

Leasing remains an option

Given the high cost of machinery, many farmers are turning to leasing as an alternative. Leasing allows for more flexibility in payment structures, but buyers need to be aware that leases today differ from the past. The “walk away lease” is virtually extinct. In most cases, the customer is responsible for the machine at the end of the lease, requiring them to either release, refinance, trade, or pay off the residual value. Understanding these obligations is crucial before entering a lease agreement.

Other factors

Farm income and broader economic conditions also play a significant role in driving equipment demand. Uncertainty around the 2024 presidential election and the potential shifts in the House and Senate add to farmers' reluctance to make large purchases. Moreover, the ongoing delay in passing a new farm bill creates further instability. Without a new bill or an extension of the current one, programs that support the agricultural sector could face chaos.

Commodity prices, particularly for corn, are showing some signs of improvement, providing a glimmer of hope for farmers. As of this writing, December corn prices closed at $4.32½, the highest since June, but for meaningful profitability, prices need to hit $4.50 or higher. Until this happens, many farmers are likely to hold off on significant investments.

Even with interest rates projected to decrease and commodity prices trending upward, relief in the used equipment market is unlikely to be felt until late 2025 or early 2026. It takes time for the benefits of lower interest rates and improved crop cycles to materialize.

Farmers will need to transition from higher interest rate operating notes to lower-rate ones, market and sell their grain, and generate profits before they are willing to reinvest in equipment. Only then will we see an uptick in demand for used machinery, helping to stabilize a market that has been hit hard in recent years.

In summary, while lower interest rates are a step in the right direction, the agricultural equipment market faces several headwinds. Falling equipment values, uncertainty around farm income, and delayed government policies all contribute to the current slowdown in equipment purchases. Until these factors stabilize, the market will likely remain sluggish.

EDITOR’S TAKE:

So, what can we take away from this article? For one, conditions down on the farm are improving, but it will take awhile for things to stabilize at a “new normal”. Another take away is, leasing is gaining popularity once again. That said, however, with mounting used equipment on the market and leases that will come due in a couple years, it will take awhile to work through the used equipment situation. Finally, we need to get past the election cycle and hopefully restore some semblance of peace and certainty in the geopolitical sphere. Bottom line, lower interest rates will help improve farmer optimism, but that alone won’t totally do the job. You can use CADFI to your advantage in situations like those we currently face. Plus, you can help farmers/ranchers reduce operating costs by promoting AgPack®, which offers up to $40,000 in exclusive rebates and discounts. Finally, they can also lease a truck and still qualify for AgPack®.