YOUR KBA Agricultural Law Section
Aug. 17, 2022
Your Partner in the Profession
CEO Sees Supply-Driven Heavy Equipment Marketplace Getting the right farm equipment at the right price is essential in today’s highly competitive and thin margin ag environment. In this edition of the Ag Law Section’s newsletter, we talk with Kyle McMahon, CEO of Tractor Zoom, which specializes in advertising heavy equipment, offers real-time tracking of prices and assists producers in finding competitive interest rates. Not only is the Tractor Zoom business model successful, but Kyle also offers critical insight on the market forces affecting farm equipment. — Michael Fielding, Chair
Q: For those who aren’t familiar with Tractor Zoom, can you briefly describe what it does? A: We help people find and value farm equipment and then help them finance it online. First, we help about 1,850 dealerships and auction companies advertise their equipment online on our platform to hundreds of thousands of farmers. Second, we track what equipment sells for and help dealerships, farm credits associations, community banks and the USDA Farm Service Agency instantly price equipment. Third, we’ve launched the industry’s first finance marketplace to help farmers get great interest rates to finance equipment very quickly online. Q: What makes Tractor Zoom unique in the marketplace? A: Among many reasons, our price transparency and our user experience stand out the most. When we help someone value a piece of equipment, we use real-time comparable sales to substantiate the value. Nobody else in the market can do that. This gives our customers trust and confidence in our data. We’ve also built a mobile friendly experience where farmers can shop for auction and dealer listed equipment side by side. Q: Tractor Zoom was started just five years ago (2017) and yet it now advertises over $10 billion in farm equipment. Why have you had such phenomenal success? A: It’s actually $12 billion per year now! The number one reason for our success is our team. We’ve built strong industry relationships, we listen to our customers, and we make it easy to list equipment on our site. Our great team and amazing technology have allowed us to spur scalable network effects that we’ve been able to build upon quickly. Q: Given rising inflation and interest rates coupled with increasing economic uncertainty, are you seeing any current trends develop with buyers, sellers or lenders dealing with heavy ag equipment? A: Great question. Two years of high farm profitability have driven wild demand for upgrading equipment. Original equipment manufacturers haven’t been able to keep up with this demand which has resulted in used equipment prices surging by 35% in the past 18 months. The market remains hot, and dealers continue to struggle to keep inventory. However, during the past three months our tractor and combine indexes are
showing we could be at a peak for used equipment prices right now. I’d suspect another rise of 200 basis points will begin to have farmers second guessing newer equipment purchases, which will pull back demand. Our customers’ No. 1 question to us is, “When will equipment prices fall?” We believe this is a supply question. If supply comes back to the market, prices could change quickly. Dealers don’t want to get caught with a lot of high-priced trade-ins like they did in 2014, which caused them to lose millions. Q: Your data-driven approach gives you a widespread perspective on the marketplace that very few have. Given your unique position, what do you see as some of the top pressing problems that producers, equipment manufacturers and lenders will face in the next six to 12 months? A: In terms of equipment, we are in a supply-driven marketplace. Overall, supply was already down 20% from last year for high-value, power-driven equipment (combines, tractors>175 horsepower, self-propelled sprayers). Now the supply of that equipment is down an additional 7% so far this year, and most of that is late model equipment that drives yields and productivity on farms. Naturally, the biggest risk is downside pressure on equipment prices. If equipment interest rates are 8–9% and OEMs figure out a way to turn on the equipment spigot and deliver equipment on time, equipment prices will likely fall. I think that is more of a 12- to 18-month picture though, and many things can change in that time as well. Q: Given your work in multiple states, do you see anything in Kansas (such as laws, economic conditions, politics, etc.) that give it a comparative advantage or disadvantage? A: Maybe the most interesting thing about Kansas is how it is not an outlier. Besides combines, it really is a great representation of how the U.S. farm machinery supply has played out across the country. Right now, the combine supply issue Continued on next page
YOUR KBA Agricultural Law Section Your Partner in the Profession Continued from previous page appears to be more dramatic and dire in Kansas. In the U.S., combine supplies are down 27% so far in 2022 compared to the same period in 2021. In contrast, Kansas has seen a 73% decrease over 2021. Admittedly, Kansas saw a leap in combine sales from 2020 to 2021 of 111% when the U.S. saw just a 17% increase. We believe that this was attributed to the volatility and liquidation of large custom harvester fleets. Q: Are there any key lessons (whether good or bad) from past farm recessions that you think people need to keep in mind given our current economic situation? A: It seems the only thing we can relate our current economic situation to in history is that agriculture is a commodity and commodities have historically done well, comparatively
speaking, in recessions. What’s making this recession different is global geopolitics, war in an important food and fertilizer region and global food shortages. On top of that we have great credit quality on the farm and interest rates are 6% today, not 18% like we had in the 1980s. That paints a pretty good picture for agriculture. Q: Are there any other questions that I failed to ask but which you think are relevant? A: The only other thing that comes to mind is that the game has changed in terms of supply of equipment. Farmers used to be able to get their equipment from multiple sources with multiple options of what to purchase. That doesn’t appear to be the case anymore. We are seeing more farmers take a proactive role by signing up for Tractor Zoom’s automated alerts to ensure they can secure the equipment they need for their operation.
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