Every month, the European Agricultural Machinery Association (CEMA) publishes a business barometer in which it asks the industry’s major players to provide their views on current sentiment and expected turnover in the coming six months.

The survey is well covered in the machinery section of the Irish Farmers Journal, but it is worth looking at as a great illustration of the problems caused by the difference between supply and demand cycles.

Machinery manufacturers are, because of the nature of their business, relatively slow to react to rapid increases in demand.

During the pandemic, there was the added problem of sourcing raw materials, which further delayed output and in turn increased demand.

Full books

Orders poured in and manufacturers had order books filled for months ahead.

Naturally, they did everything they could to increase production.

There was a dip in sentiment in 2022 around the Russian invasion of Ukraine, before another rallying into the end of the year.

In the February 2023 report, CEMA said “a slowdown in demand is not in sight in the short term” and that orders at manufacturers corresponded to seven months of production.

While it might not have been in sight, a slowdown in demand was not only coming, it was coming hard and fast.

Since February, the business climate index has suffered an almost vertical drop to reach the April level of -57 (the index is reported on a scale between -100 and +100, where zero is the dividing point between improving and deteriorating sentiment).

The most recent report, for April 2024, said that dealers are not able to pass their orders on to end customers and that stocks at dealers in most European markets are at levels significantly higher than the previous peak in 2019.

In a nutshell, what happened here is a very typical business cycle. A surge in demand is met by an increase in supply.

But due to the mismatch between demand and the ability of suppliers to increase production, demand pushes even higher. Orders pour into manufacturers who increase output.

Dried up

Suddenly, demand dried up last year - weaker commodity prices in 2023, increases in the cost of credit and surging inflation all hit investment at farm level, leaving dealers with machines in stock and on order that they cannot sell.

No wonder then that the survey for April showed that only 5% of industry representatives consider the current situation to be favourable.

This cycle is not unique to the farm machinery business - it exists everywhere in the economy. As the old saying goes, the best cure for high prices is high prices.

At farm level, the same cycle exists. Demand for products, whether they be dairy, meat or grain, fluctuates over the years.

New markets emerge and old ones collapse. During the good times, it can feel like the money coming in will last forever and during the bad times, it can feel like there is no future in the industry.

However, it is important to remember that businesses run in cycle. Just as the good times cannot last, the bad times too will pass. Investments in production when prices are high will drive prices lower. Lack of investment when times are bad will curtail future output, thereby driving future prices higher.