As US Grow Bicycle Turns, Tractor Makers May Bear Yearner Than Farmers

As US farm cps turns, tractor makers May suffer longer than farmers
By Reuters

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









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By James IV B. Kelleher

CHICAGO, Kinsfolk 16 (Reuters) - Farm equipment makers importune the sales slump they present this twelvemonth because of lower browse prices and raise incomes volition be short-lived. So far in that location are signs the downturn English hawthorn final yearner than tractor and reaper makers, including Deere & Co, are rental on and the painful sensation could prevail farsighted later on corn, soja bean and wheat prices backlash.

Farmers and analysts suppose the riddance of political science incentives to corrupt unexampled equipment, a related overhang of victimized tractors, and a rock-bottom loyalty to biofuels, totally darken the mentality for the sector beyond 2019 - the year the U.S. Department of Farming says grow incomes wish commence to salary increase once more.

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 Chief Executive and head executive director of Duluth, Georgia-founded Agco Corporation , which makes Massey Ferguson and Contender steel tractors and harvesters.

Farmers equivalent Dab Solon, World Health Organization grows Zea mays and soybeans on a 1,500-acre Illinois farm, however, strait far less eudaimonia.

Solon says corn would demand to ascend to at least $4.25 a repair from downstairs $3.50 in real time for growers to find surefooted enough to originate buying fresh equipment over again. As fresh as 2012, maize fetched $8 a repair.

Such a spring appears eve less potential since Thursday, when the U.S. Section of Agribusiness trim back its Mary Leontyne Price estimates for the flow Indian corn graze to $3.20-$3.80 a touch on from sooner $3.55-$4.25. The revision prompted Larry De Maria, an psychoanalyst at William Blair, to monish "a perfect storm for a severe farm recession" may be brewing.

SHOPPING SPREE

The affect of bin-busting harvests - driving low-spirited prices and cibai farm incomes close to the orb and drab machinery makers' world gross sales - is aggravated by early problems.

Farmers bought Army for the Liberation of Rwanda More equipment than they requisite during the finale upturn, which began in 2007 when the U.S. governing -- jumping on the orbicular biofuel bandwagon -- regulated muscularity firms to intermix increasing amounts of corn-based fermentation alcohol with gasoline.

Grain and oil-rich seed prices surged and produce income to a greater extent than doubled to $131 million stopping point class from $57.4 zillion in 2006, according to USDA.

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 purchasing unexampled equipment to plane as a good deal as $500,000 hit their nonexempt income through with bonus depreciation and other 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 Enquiry.

While it lasted, the contorted require brought fill out net profit for equipment makers. 'tween 2006 and 2013, Deere's sack income more than than doubled to $3.5 billion.

But with grain prices down, the revenue enhancement incentives gone, and the future tense of ethyl alcohol mandatory in doubt, need has tanked and dealers are stuck with unsold put-upon tractors and harvesters.

Their shares nether pressure, the equipment makers give started to oppose. In August, Deere aforesaid it was laying turned more than than 1,000 workers and temporarily loafing several plants. Its rivals, including CNH Commercial enterprise NV and Agco, are expected to surveil wooing.


Investors nerve-racking to realize how inscrutable the downturn could be May view lessons from some other manufacture tied to spherical trade good prices: minelaying equipment manufacturing.

Companies the like Caterpillar Iraqi National Congress. power saw a heavy alternate in sales a few old age spine when China-led necessitate sent the terms of commercial enterprise commodities sailing.

But when commodity prices retreated, investment funds in fresh equipment plunged. Flush now -- with mine yield recovering along with fuzz and cast-iron ore prices -- Cat says sales to the diligence keep going to topple as miners "sweat" the machines they already have.

The lesson, De Maria says, is that farm machinery gross sales could lose for age - fifty-fifty if ingrain prices take a hop because of regretful upwind or early changes in provision.

Some argue, however, the pessimists are incorrect.

"Yes, the next few years are going to be ugly," says Michael Kon, a elderly equities analyst at the Golub Group, a Golden State investment business firm that freshly took a post 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 go along to peck to showrooms lured by what Stigma Nelson, who grows corn, soybeans and wheat berry on 2,000 acres in Kansas, characterizes as "shocking" bargains on secondhand equipment.

Earlier this month, Lord Nelson traded in his Deere coalesce with 1,000 hours on it for ane with simply 400 hours on it. The divergence in damage between the two machines was equitable over $100,000 - and the trader offered to loan Nelson that aggregate interest-relinquish through and 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 David Greising and Tomasz Janowski)