Summer 2022 Market Update
Review of Results
The Spring of 2022 saw unprecedented change in markets and a rate of rise on machinery and land values unseen for decades. Auctions have always been the first up and the first down when it comes to market movement and activity. We’ve come to expect a constant rise these last few years, and there is no question the spring of 2022 saw an even greater, accelerated rate of rise. It would be fair to say we saw land and machinery sales on individual pieces we would have never even had the courage or imagination to think the prices attained would be possible! Is this a healthy environment? We’ll see the outcome of these current market levels in the coming months. Right now, it seems any item or piece of land has way more buyers than needed, and auctions are where all this true price discovery of current markets has been taking place. There isn’t much in the marketplace to indicate we are in any danger of a downturn, but perhaps a bit of a pause in the rise might be welcome, so everyone has a chance to catch up and understand where break-even and profit and loss will truly stand. You’ll see it first when seller’s expectations (which always seem to be higher than buyers) finally cause buyers to pause.
What Will Change This Market?
Until supply catches up, there won’t be much diminished demand in any market for used equipment. Whether it’s construction equipment, tractors, trucks, or even specialty items, there is no large availability anywhere, at least through the summer months. That means anyone with needs is left to outbidding everyone else if there is a job to do or an item needed. If supply doesn’t look like it is increasing, demand is the only element to move the market. Everyone is expecting a rise in interest rates, which will change the economy with the stroke of a pen. The other side of demand change will be weather-related, affecting crop production and work activity. We can only guess what that future holds, but mother nature certainly seems to be playing her large part as we write.
History will tell you that interest rate changes significantly affect values on the real estate end. In this market, the expected rate hikes might be somewhat in already, and we don’t expect short-term markets to react other than slowing the rate of rise or establishing where the short-term highs will be. This will be healthy. We also expect to see summer markets which are always typically slower from a supply side, show us the tops for the short term. That leaves us with how the weather will play its part in the coming months. Overall, there doesn’t seem to be much, if any, downside pressure on land values anywhere. There is simply too much demand, cash, and few alternatives for investors to shy away from real estate investing. Keep in mind this spring; investors have been predominantly outbid by operators who are enjoying record balance sheets and net worth numbers plugging in big commodity numbers to justify aggressive cash flows.
Other than a healthier, slower rate of rise the only threat we see in short-term markets is crop failure to slow demand or a more than 2-point rise in interest rates. We’ll have to wait and see if either will occur. On the construction side, the backlog of work will get most operators through the remainder of the year as they will wait to see if these inflationary times and crazy price increases shuts off the more than full pipeline of work.
Is This Just Like the Late ’70s?
I hear that observation quite a bit in our travels. In our view, the short answer is no, not yet. Everyone wants to be able to predict the future. It’s too bad we can’t with any great accuracy, but what we can do is use history to guide our decision process. The last inflationary period was followed by one of the toughest and most disastrous times experienced in agricultural and construction markets. However, the most significant difference between the late ’70s and now, is debt. Back then, collateral lending, borrowing on net worth and not cash flow and profits, was prolific. We don’t have that going on right now. Historic land sales have brought many CASH buyers to the table! Profits for many operators have never been higher. That is the most significant difference, and we’re a long way from 18% interest. That’s not to say markets will continue to rise forever and never correct, but we see little, short-term danger in any sudden market downturn. Watch the fundamentals and most crucial profit potential, and we’ll be just fine. As always, profits ultimately drive markets. The best strategy for anyone is to focus on whatever it takes to make money so that equipment can be updated and expansion made possible at the end of the year. If you can find good used machinery to fulfill your needs, history will tell you that buying used makes more sense. If a piece of ground comes up for sale across the road, you must figure out a way to buy it and get it paid for. Those that have followed these simple strategies have always been the most successful over the long term and seem to survive and prosper through both good and bad times. I don’t see any reason why this won’t always be true.
Scott Steffes, President
Steffes Group, Inc.