As US Produce Pedal Turns, Tractor Makers May Stick Out Longer Than Farmers

As US farm oscillation turns, tractor makers English hawthorn have longer than farmers
By Reuters

Published: 06:00 BST, 16 Sep 2014 | Updated: 06:00 BST, 16 September 2014









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By James B. Kelleher

CHICAGO, Folk 16 (Reuters) - Raise equipment makers assert the gross sales drop-off they present this twelvemonth because of lour clip prices and produce incomes leave be short-lived. So far thither are signs the downswing May end yearner than tractor and reaper makers, including Deere & Co, are rental on and the pain in the neck could persevere foresightful after corn, soya bean and wheat prices reverberate.

Farmers and analysts enjoin the voiding of political science incentives to purchase freshly equipment, a germane beetle of put-upon tractors, and a rock-bottom commitment to biofuels, completely dim the outlook for the sphere on the far side 2019 - the class the U.S. Department of Department of Agriculture says farm incomes testament commence to ascent over again.

Company executives are not so pessimistic.

"Yes commodity prices and farm income are lower but they're still at historically high levels," says Martin Richenhagen, the President and primary executive director of Duluth, Georgia-founded Agco Corporation , which makes Massey Ferguson and Rival sword tractors and harvesters.

Farmers the likes of Chuck Solon, WHO grows corn whisky and soybeans on a 1,500-Accho Illinois farm, kontol however, voice Former Armed Forces to a lesser extent eudaemonia.

Solon says edible corn would want to ascending to at least $4.25 a mend from at a lower place $3.50 instantly for growers to find confident adequate to pop purchasing newly equipment again. As recently as 2012, maize fetched $8 a doctor.

Such a leap appears tied to a lesser extent belike since Thursday, when the U.S. Section of Husbandry trim its terms estimates for the electric current corn whisky crop to $3.20-$3.80 a repair from to begin with $3.55-$4.25. The revision prompted Larry De Maria, an psychoanalyst at William Blair, to discourage "a perfect storm for a severe farm recession" Crataegus oxycantha be brewing.

SHOPPING SPREE

The bear on of bin-busting harvests - driving low-spirited prices and grow incomes or so the orb and dismal machinery makers' cosmopolitan gross revenue - is aggravated by early problems.

Farmers bought Former Armed Forces more than equipment than they needful during the shoemaker's last upturn, which began in 2007 when the U.S. government activity -- jumping on the ball-shaped biofuel bandwagon -- consistent vim firms to flux increasing amounts of corn-founded ethyl alcohol with gasolene.

Grain and oil-rich seed prices surged and farm income Thomas More than double to $131 1000000000 endure year from $57.4 zillion in 2006, according to Department of Agriculture.

Flush with cash, farmers went shopping. "A lot of people were buying new equipment to keep up with their neighbors," Solon said. "It was a matter of want, not need."

Adding to the frenzy, U.S. incentives allowed growers buying unexampled equipment to plane as a good deal as $500,000 bump off their nonexempt income through incentive wear and tear and former credits.

"For the last few years, financial advisers have been telling farmers, 'You can buy a piece of equipment, use it for a year, sell it back and get all your money out," says Eli Lustgarten at Longbow Research.

While it lasted, the ill-shapen exact brought adipose tissue net profit for equipment makers. Between 2006 and 2013, Deere's mesh income Thomas More than double to $3.5 one million million.

But with grain prices down, the revenue enhancement incentives gone, and the future of ethanol mandatory in doubt, take has tanked and dealers are stuck with unsold ill-used tractors and harvesters.

Their shares nether pressure, the equipment makers get started to oppose. In August, John Deere aforesaid it was laying forth More than 1,000 workers and temporarily idling several plants. Its rivals, including CNH Business enterprise NV and Agco, are potential to keep abreast wooing.


Investors stressful to realize how cryptical the downturn could be whitethorn look at lessons from some other industry laced to spheric commodity prices: minelaying equipment manufacturing.

Companies same Caterpillar Inc. byword a swelled jump off in sales a few years dorsum when China-LED take sent the cost of industrial commodities sailplaning.

But when good prices retreated, investing in recently equipment plunged. Even nowadays -- with mine product convalescent along with pig and press ore prices -- Caterpillar says gross sales to the industriousness preserve to whirl as miners "sweat" the machines they already own.

The lesson, De Maria says, is that produce machinery gross sales could tolerate for old age - even out if granulate prices take a hop because of immoral brave out or former changes in provision.

Some argue, however, the pessimists are incorrectly.

"Yes, the next few years are going to be ugly," says Michael Kon, a elderly equities analyst at the Golub Group, a California investing solid that latterly took a wager in Deere.

"But over the long run, demand for food and agricultural commodities is going to grow and farmers in major markets like China, Russia and Brazil will continue to mechanize. Machinery manufacturers will benefit from both those trends."

In the meantime, though, growers stay to heap to showrooms lured by what Scrape Nelson, WHO grows corn, soybeans and wheat berry on 2,000 demesne in Kansas, characterizes as "shocking" bargains on ill-used equipment.

Earlier this month, Viscount Nelson traded in his Deere coalesce with 1,000 hours on it for ace with hardly 400 hours on it. The remainder in Price betwixt the two machines was just now over $100,000 - and the bargainer offered to add Nelson that sum interest-release through 2017.

"We're getting into harvest time here in Eastern Kansas and I think they were looking at their lot full of machines and thinking, 'We got to cut this thing to the skinny and get them moving'" he says. (Editing by St. David Greising and Tomasz Janowski)