Pain for equipment makers could continue well beyond upturn
Yet there are signs the downturn may last longer than tractor and harvester makers& are letting on and the pain could persist long after corn, soybean and wheat prices rebound.
Farmers and analysts say the elimination of government incentives to buy new equipment, a related overhang of used tractors, and a reduced commitment to biofuels, all darken the outlook for the sector beyond 2019 — the year the US Department of Agriculture says incomes will begin to rise 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 chief executive of Agco, which makes Massey Ferguson and Challenger tractors and harvesters.
Farmers like Pat Solon, who grows corn and soybeans on a 1,500-acre Illinois farm, says corn would need to rise to at least $4.25 (€3.27) a bushel from below $3.50 (€2.70) now for growers to feel confident enough to start buying equipment again. As recently as 2012, corn fetched $8 (€6.20) a bushel.
Such a bounce appears even less likely since last Thursday, when the US Department of Agriculture cut its price estimates for the current corn crop to $3.20-$3.80 a bushel from earlier $3.55-$4.25.
Larry De Maria, an analyst at William Blair, warned “a perfect storm for a severe farm recession” may be brewing.
The impact of bin-busting harvests — driving down prices and farm incomes around the globe and depressing machinery makers’ worldwide sales — has been aggravated as farmers bought far more equipment than they needed during the last upturn.
Grain and oilseed prices surged and farm income more than doubled to $131bn (€101bn) last year from $57.4bn (€44bn) in 2006, according to USDA.
Flush with cash, farmers went shopping. “A lot of people were buying new equipment to keep up with their neighbours,” Mr Solon said. “It was want, not need.”
Adding to the frenzy, US incentives allowed growers buying new equipment to shave as much as $500,000 (€385,000) off their taxable income through bonus depreciation and other credits.
While it lasted, the distorted demand brought fat profits for equipment makers. Between 2006 and 2013, John Deere & Co’s net income more than doubled to $3.5bn.
But with grain prices down, the tax incentives gone, and the future of ethanol mandate in doubt, demand has tanked and dealers are stuck with unsold used machinery.
In August, Deere said it was laying off more than 1,000 workers and temporarily idling several plants. Its rivals, including CNH Industrial and Agco, are expected to follow suit.
Investors trying to understand how deep the downturn could be may consider lessons from another industry tied to global commodity prices: mining equipment.
Companies like Caterpillar saw a big jump in sales a few years back when China-led demand sent the price of industrial commodities soaring.
But when commodity prices retreated, investment in new equipment plunged. Even today — with mine production recovering — Caterpillar says sales to the industry continue to tumble as miners “sweat” the machines they already own.
The lesson, Mr De Maria said, is that farm machinery sales could suffer for years, even if grain prices rebound.
