Farmers Are Buying Up Old Tractors Because New Ones Are Pointlessly Complicated and Expensive | Is John Deere alienating customers by pricing themselves out of the market?

by TimAppleBurner

www.thedrive.com/news/31761/enormous-costs-of-new-tractors-drive-demand-of-40-year-old-equipment-to-all-time-highs?xid=fbshare

In this piece by The Drive, the author proposes a scenario in which John Deere slowly loses its customer base by creating a technologically advanced product, raising prices to the point that older loyal customers are turning to secondary used markets to fulfill their equipment to needs.

Agriculture has long been an industry participated in by few, but contributes the sustenance of many. Ag has high upside when producers can maximize efficiency, find production equilibrium with supply needs through economies of scale (which allows for fewer producers to need to play and those producers increase the size of their enterprise). But in order to really make economies of scale advantageous, it requires mechanized help.

John Deere tractors are your flagship tractor. When you think of tractors, the green with yellow accented behemoths tilling those fields are probably the first that come to mind. But what happens when farmers begin to look at secondary markets to satiate their equipment needs when the producer of their prized equipment no longer is working with their customers to meet their needs?

Newer models can run upwards of $300,000 for a rig even on the used market. Why pay $200,000+ for a machine that you could buy for $30,000 thats 40 years old? In fact, farmers are turning to these older machines because they are less complicated to fix. But the demand for those older models are actually driving up the prices in the secondary markets because sellers realize how valuable their old machines are becoming.

John Deere tractors are becoming more technologically advanced, but this may not be a good thing. Deere is raising the prices of their machines, and making it such that farmers are looking to used markets to find older machines. If you’ve ever worked on an old car, you can think of it in the same manner—the older tractors are very barebones and mainly mechanical. If you understand how to repair the machine, it’s a fairly straightforward process.

Not only is the upfront cost a factor when it comes to investing in one of these machines, but maintenance repairs is a contributing factor. These newer machines have technological locks built into the operating systems that limit private owners from performing their own repairs on the machine, forcing them to contact the dealership, have them send out a mechanic representative at the dealerships convenience, potentially holding up production for extended periods of time. This puts the farmer’s operations at a reduced level unnecessarily, and at a greater cost, than what they normally would repair themselves.

Due to this, farmers have found an outside solution to this roadblock Deere corporate has put in place to lock the technology systems of the machines: Ukrainian software hacks.October of 2016, buyers were required to sign a licensing agreement forbidding the repair and modification of farming equipment.

Is John Deere alienating one of its leading sales segments? With international trade agreements being formed, amended and expanded—soybean, grain and corn is going to be in great demand. Farmers are going to need equipment that fulfills their operations, small or large scale. These new equipment prices, in addition to prices to maintain the machines, are going to be passed onto consumers, ultimately driving up prices for some of our most common goods. Why pay more than you have to for a machine today when one three decades old can be refurbished and folded into operation for significantly less cost?

According to their financial statements, FY 2019 revenue was the first year since FY 2014 that it was greater. Bringing in $39.26B in 2019, 8.9% greater than the second highest year this decade in FY 2014 at $36.02B. $DE’s brought in a net profit of $3.25B in FY 2019, up 2.8% from FY 2014. FY 2015-2018 all showed negative growth from the peak in 2014 if omitting 2019 data.

With John Deere and Caterpillar ($CAT) being some of the leading manufacturing segments in the United States, is manufacturing at risk if $DE doesn’t change their business model to be more accommodating to their customers? $DE and $CAT are both major construction equipment manufacturers, with Caterpillar leading over Deere in that segment.

From John Deere’s financial statements, they revenued $20,511B in Ag sales (84% of total sales), compared to construction at $3,831B (16% of their equipment sales). So clearly, their ag customers will have significant leverage if a portion of them begin to look in the secondary markets for used equipment they can fix themselves, or even if they purchase new equipment, but use this Ukrainian hack to crack the operating systems of their machines and fix it themselves.

With agriculture being Deere’s most prominent segment, if they don’t begin to accommodate their farmer customers more carefully, $DE could begin to face sales pressures in the next coming years. The commodities will be needed to be farmed with or without Deere, so will they bend the knee? Or continue in an adverse customer-producer relationship that ultimately may hurt the company. If Deere doesn’t change their business model, they may eventually price themselves out of the market.

TL; DR: if John Deere doesn’t start making efforts to work with the customers as opposed to trying to squeeze every penny out of them.