Lenders faced with the challenge of valuing agriculture and outdoor power equipment should be aware of four common pitfalls.
Perils of historical depreciation
When determining what the value of equipment will be at some point in the future, it can be tempting to use past performance, as reflected in historical depreciation rates, as the benchmark for expected future value. However, that method does not account for market occurrences driving the value at that time, such as commodity prices, the demand for used equipment, and other market factors.
Using historical depreciation from a similar model for a 2011 CIH Magnum 215 tractor (Figure 1) results in a valuation that is off by about $34,000, or 34%.
Figure 1
Decisions based on averages
Another common approach used when valuing agriculture and outdoor power equipment is to rely on averages. While the use of an average value can appear to deliver a quick estimate, averages can distort the actual valuation because of outliers, sparse data points, and wide variation in data.
Figure 2 shows auction and retail transactions in 2016 for a John Deere 2014 8285R tractor. The graph on the left gives an average of $139,625, clearly unrelated to any of the actual sales prices, which range from $62,250 to $154,000. The graph on the right has 54 retail sales transactions, but the prices here also vary considerably. The differences are driven by the varying options, hours, and regions where the equipment was sold.
Figure 2
In the retail sale example, the average cannot capture the tremendous variation in prices or options. This model has at least 35 options, with a possible combination of 34,359,738,367 different equipment configurations. The number of configurations explains in part the variation in sales prices seen above.
How can a lender avoid a costly mistake in underestimating or overestimating a tractor like this? A tool like IronGuides allows adjustment and valuation for hours, options, and regions.
Are auction results a good source for equipment valuations?
Basing valuation on only advertised pricing and auction results is not indicative of what the equipment is worth. Auction results alone give an unreliable estimate of value since the auction environment can be erratic and accurate option details can be difficult to obtain. This, combined with subjective condition evaluations, can make accurate comparisons difficult.
Figure 3
When comparing the retail versus auction results of selected Case and John Deere combine models (Figure 3), the sales prices from dealer retail transactions are significantly higher for both models, with the average dealer retail price for the Case combine 27% higher than auction. The Deere combine’s average dealer retail price was 25% over the average auction value. Overall, for all combines sold in 2016 in the database, the auction results showed much more variance, ranging from $125,000 to $359,000 on only 64 sales. Meanwhile, dealer retail transactions, on a much larger volume of 607 transactions, varied between $155,000 and $295,000.
With the increased number of online farm auctions due to the pandemic, lenders should be cautious when using auction data to value equipment. While auction data has value, it is only one data source. Dealer sold reports are the best valuation source. They represent a price determined at arm’s length between a willing buyer and a willing seller.
Tools to help lenders avoid common pitfalls
Iron Solutions, which has a long history in the valuation of agricultural equipment, holds the largest agricultural equipment database of dealer sold and auction transactions in the North American market. Records span 30 years with more than 16,000 models of equipment, totaling more than $80 billion in dealer-reported retail sold reports. With these guides, you can obtain region-specific valuations and adjust for options, including historical values.
To read more about common mistakes in equipment valuation, explore these resources:
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