A stealth deadline is quietly creeping up on Canadian farmers with the power to rewrite your investment costs. It even sounds innocent enough to sneak under your radar screens. After all, it’s just the pending implementation date of the U.S. Environmental Protection Agency’s Interim Tier 4 emissions regulation for off-road diesels.
Beginning in January, however, every diesel engine over 175 horsepower installed in new farm machinery sold in the U.S. must comply with the IT4 standard, effectively driving up the price of diesel machinery throughout the continent by an expected 10 per cent. And that’s just a start.
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Canada is in the crosshairs because the new emissions regulation is much bigger than just the U.S. The EPA standard is also being endorsed in most OECD countries and it has been harmonized with the EU’s Stage IIIB equivalent.
That means manufacturers on both sides of the Atlantic are gearing up to standardize engine production in line with the new rules. And Canadian tractors will therefore be equipped the same way as U.S. and European models.
IT4 emissions regulations require a 90 per cent reduction in particulate matter and a 50 per cent drop in nitrogen oxides compared to current Tier 3 engine designs. To understate it, designing that capability into engine systems has been a mammoth undertaking. When the first two tiers of the EPA’s multilevel regulations were adopted in Canada in 2005, the technology to meet the final stages didn’t even exist. Even today, no one is certain how the last step, Final Tier 4, which comes into force in 2015, will be met.
In response, the major machinery manufacturers stepped up their engineering efforts to concentrate on engine development. As part of that, Case IH added additional engine testing bays to its R&D facility in Burr Ridge, Illinois. Fiat Powertrain Technologies (FPT), now has a permanent presence there to participate in engine development. (Fiat is Case IH’s parent company.)
When management at John Deere walked farm journalists through their Product Engineering Centre in Waterloo, Iowa in 2009, Ken Moehle, manager of tractor core technology engineering showed off some of that company’s newly expanded engine testing facilities. “As an engine manufacturer, we’ve made a tremendous investment,” Moehle said, before responding to questions about how much by simply saying “many millions of dollars.”
Deere’s engine testing in Waterloo now amounts to more than 150,000 hours per year. Engine research there has been the dominant activity for a long time because of the EPA regulations.
The story is similar at all the major engine builders.
A long way north
As is always the case in the marketplace, manufacturers facing steep increases in production costs are looking to pass them along to the consumer. So brace yourself. The cost of new tractors and combines is set to head north, a long way north.
In fact, we may be on the verge of the largest single-year price increase seen in decades. Although no major manufacturer had released its new price lists for 2011 at the time of writing, there are some estimates floating around that hint at what’s to come.
“What the industry seems to be expecting is about a 10 to 12 per cent (price) increase because of Interim Tier 4,” says Adam Reid, Buhler Industries’ marketing manager for the Versatile tractor brand which uses engines supplied by Columbus, Indiana-based Cummins Inc. “We haven’t announced our final pricing yet, but it sounds like that number could be well in line,” Reid says. “We’re still going through the numbers to see what the additional technology from Cummins is costing us.”
Speaking in an interview in July, Claas of America president Russ Green, said some of the speculation in the industry at that time pegged the potential cost increases even higher. “There are all kinds of numbers floating around out there,” Green said. “Adding Tier 4 to a combine could increase the cost by up to 22 per cent.”
Remarkably, there has been little fuss about IT4 in Canada. But any producer intending to update powered equipment in the farm fleet after January may want to take notice and act fast. That’s the only way to avoid those pending price increases.
“The U.S. has been talking about this — these upcoming rules — and what it means to the farmers for a year and a half,” says Reid. “I think we’re a little bit behind in terms of spreading the word in Canada, but I do expect there’ll be a run on new Tier 3 tractors.”
The result of that increased awareness in the U.S. is a hot market for tractors and combines. Farmers have been rushing to American dealerships to ink new deals while Tier 3 standards are still in force. But despite the fact Canadian producers are in exactly the same position as their U.S. cousins, that hasn’t been the case here.
According to the Association of Equipment Manufacturers (AEM), August sales numbers were up substantially across the U.S. Rigid-frame tractors above 100 horsepower saw an incredible 48.8 per cent rise over the same month in 2009. Articulated, four-wheel drive tractors jumped 9.5 per cent, while combine sales climbed 9.9 per cent. September numbers showed similar increases.
Commenting on the increased combine sales numbers, Green attributed much of it to a race to beat IT4. “I think it’s due to pre-buys,” Green said. “Producers are looking for the next generation of (threshing) technology combined with a Tier 3 engine.”
In Canada, AEM reports year-to-date sales are up over 2009, but activity has been nowhere near U.S. levels. However, there is still time to buy a Tier 3-equipped machine.
Manufacturers will still be able to sell any existing inventories of Tier 3-equipped tractors and combines on hand after the 2011 implementation date, and the EPA gave them some options to slowly phase in IT4 engine production, even after the deadline. But farmers who want a new machine without paying for the new technology will see their choices get more limited over the next few months.
While many Western countries already have legislation to mandate future emissions levels, the lack of Canadian standards has manufacturers a little nervous. The financial implications of getting it wrong are substantial.
“We have to make an assumption here, and go by the U.S. EPA standards,” says Versatile’s product manager for tractors, Ryan Shust. “We have no other choice. But if the rule is anything other than what we expect — if they add a requirement — it could stop our marketing here in Canada.”
It’s widely expected, though, that Canada will simply adopt the U.S. IT4 standard as is. So far Canada has followed suit on Tiers 2 and 3. “We’ve had a policy of alignment with the U.S.,” says Josée Lavergne, manager of air pollutant regulatory development for the transportation division at Environment Canada. And she expects that to continue. “We’re working on updating our regulations to come into line with the U.S.”
However, manufacturers won’t need to meet the same tough emissions standards in every country. For example, Russia and the Commonwealth of Independent States in Eastern Europe will still be importing machinery that only complies with Tier 3 emissions levels. Part of the reason is that the ultra-low sulphur diesel required by IT4 engines isn’t widely available there.
That complicates things for manufacturers. They now face the necessity of managing two different standards for machinery coming down the assembly line, building export-only Tier 3 tractors and combines for some countries and IT4 versions for others.
The EPA has authority to audit all manufacturers selling into the U.S. market to ensure compliance. And they’re playing for keeps. “If we ship a non-compliant tractor to the U.S. that we have not accounted for after January 2011, the fine is $35,000 per tractor, per day,” notes Reid. So record-keeping and tracking of new equipment becomes paramount.
“The other challenge it brings to us is in terms of inventory,” Reid adds. “The tractors we sell to Russia now are more or less the same as tractors we sell in North America. If an order from an export customer is cancelled or reduced, we still have the opportunity to sell those tractors here. After January first, that becomes a lot more complicated.”
But what happens in 2015 when the Final Tier 4 standard comes into force and the bar is set higher again? Indications are it may not create as much turmoil as IT4. Equipment designers are thinking long term and are incorporating many of the changes into new machines to accommodate these engines. Besides, jumping from Tier 3 to IT4 required the largest jump in technology in the entire multi-phase plan.
So, upgrading to Final Tier 4 will be much easier — and likely much less costly. But if you consider the fact that teams of engineers at all the big companies are still figuring out how they’ll meet the last level of emissions regulations, that’s far from a sure thing.CG
