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Equipment dealers have struggled to keep tractors and combines
in stock due to strong demand and supply-chain snarls that have
kept prices high and orders on backlog. They may soon face the
opposite problem of having too much inventory as demand eases
just as production picks up, industry experts said.
"We're watching this closely because we don't want to get
ourselves to where there's an oversupply," said John Schmeiser,
COO of North American Equipment Dealers Association (NAEDA), a
trade group that represents independent dealers.
Machinery sitting idle on dealer lots could jeopardize
manufacturers' margins next year.
In recent quarters, heavy equipment manufacturers including
Deere & Co and Caterpillar have handily beaten Wall Street
earnings.
A slump for new orders from farmers and commercial customers
should make machinery manufacturers more conservative with
production, said Baird senior research analyst Mircea Dobre.
"If we continue to see these inventory increases, that
essentially poses a risk for production in 2024."
Higher borrowing costs have also battered manufacturing, with
the Institute for Supply Management reporting this month that
its manufacturing PMI remained stuck below the 50 threshold in
June for the eighth straight month. The downturn in new orders
for machinery and equipment, which includes construction and
farming, outpaced all other manufacturing industries, according
to data by S&P Global.
But Caterpillar has touted resilient sales from mining customers
and an increase in construction sales stemming from U.S.
infrastructure spending. Deere and CNH Industrial, which reports
earnings on Friday, continue to see operating margins for
precision and agriculture products trend upward as farmers look
to cut costs on crop inputs, such as fertilizers and pesticide
applicators.
While farmers' balance sheets remain relatively strong,
economists at the Federal Reserve Bank of St. Louis are citing
"profitability concerns" in the second half of the year for
growers and the agriculture sector.
Caterpillar is expected to post second-quarter earnings next
week of $2.37 billion, up 39.5% from a year ago. Its rival Deere
is projected to post solid growth as well with net income of
$2.39 billion, a nearly 32% increase from the prior year. Deere
will report third-quarter results on Aug. 18.
(Reporting by Bianca Flowers in Chicago; Editing by Caroline
Stauffer and Matthew Lewis)
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