|
 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 U.S. Department of Agriculture
says farm 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 Duluth, Georgia-based Agco Corp , which makes
Massey Ferguson and Challenger brand tractors and harvesters.
Farmers like Pat Solon, who grows corn and soybeans on a 1,500-acre
Illinois farm, however, sound far less upbeat.
Solon says corn would need to rise to at least $4.25 a bushel from
below $3.50 now for growers to feel confident enough to start buying
new equipment again. As recently as 2012, corn fetched $8 a bushel.
Such a bounce appears even less likely since Thursday, when the U.S.
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. The
revision prompted Larry De Maria, an analyst at William Blair, to
warn "a perfect storm for a severe farm recession" may be brewing.
SHOPPING SPREE
The impact of bin-busting harvests - driving down prices and farm
incomes around the globe and depressing machinery makers' worldwide
sales - is aggravated by other problems.
Farmers bought far more equipment than they needed during the last
upturn, which began in 2007 when the U.S. government -- jumping on
the global biofuel bandwagon -- ordered energy firms to blend
increasing amounts of corn-based ethanol with gasoline.
Grain and oilseed prices surged and farm income more than doubled to
$131 billion last year from $57.4 billion 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 buying new
equipment to shave as much as $500,000 off their taxable income
through 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
Research.
While it lasted, the distorted demand brought fat profits for
equipment makers. Between 2006 and 2013, Deere's net income more
than doubled to $3.5 billion.
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 tractors and harvesters.
[to top of second column] |
Their shares under pressure, the equipment makers have started to
react. In August, Deere said it was laying off more than 1,000
workers and temporarily idling several plants. Its rivals, including
CNH Industrial NV 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 manufacturing.
Companies like Caterpillar Inc. 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 along with
copper and iron ore prices -- Caterpillar says sales to the industry
continue to tumble as miners "sweat" the machines they already own.
The lesson, De Maria says, is that farm machinery sales could suffer
for years - even if grain prices rebound because of bad weather or
other changes in supply.
Some argue, however, the pessimists are wrong.
"Yes, the next few years are going to be ugly," says Michael Kon, a
senior equities analyst at the Golub Group, a California investment
firm that recently took a stake 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 continue to flock to showrooms
lured by what Mark Nelson, who grows corn, soybeans and wheat on
2,000 acres in Kansas, characterizes as "shocking" bargains on used
equipment.
Earlier this month, Nelson traded in his Deere combine with 1,000
hours on it for one with just 400 hours on it. The difference in
price between the two machines was just over $100,000 - and the
dealer offered to lend Nelson that sum interest-free 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)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
