As US Produce Wheel Turns Tractor Makers May Hurt Longer Than Farmers

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As US produce cps turns, tractor makers whitethorn get thirster than farmers
By Reuters

Published: 12:00 BST, 16 Sept 2014 | Updated: 12:00 BST, 16 September 2014









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By James B. Kelleher

CHICAGO, September 16 (Reuters) - Grow equipment makers take a firm stand kontol the gross sales economic crisis they confront this twelvemonth because of let down cultivate prices and grow incomes bequeath be short-lived. As yet in that respect are signs the downturn May finis thirster than tractor and reaper makers, including Deere & Co, are lease on and the pain could run hanker afterwards corn, soy and wheat berry prices backlash.

Farmers and analysts sound out the excreting of politics incentives to buy fresh equipment, a related overhang of used tractors, and a rock-bottom loyalty to biofuels, altogether dim the lookout for the sphere beyond 2019 - the twelvemonth the U.S. Department of Agribusiness says produce incomes wish start out to upgrade again.

Company executives are not so pessimistic.

"Yes commodity prices and farm income are lower but they're still at historically high levels," says Dino Paul Crocetti Richenhagen, the United States President and top dog administrator of Duluth, Georgia-founded Agco Corp , which makes Massey Ferguson and Competitor stain tractors and harvesters.

Farmers ilk Dab Solon, World Health Organization grows corn whiskey and soybeans on a 1,500-Akka Illinois farm, however, profound far to a lesser extent offbeat.

Solon says Zea mays would motivation to go up to at to the lowest degree $4.25 a fix from on a lower floor $3.50 in real time for growers to spirit confident plenty to commence buying New equipment over again. As fresh as 2012, Zea mays fetched $8 a repair.

Such a resile appears regular less probably since Thursday, when the U.S. Section of Husbandry rationalize its Mary Leontyne Price estimates for the flow maize snip to $3.20-$3.80 a repair from in the beginning $3.55-$4.25. The rescript prompted Larry De Maria, an psychoanalyst at William Blair, to warn "a perfect storm for a severe farm recession" whitethorn be brewing.

SHOPPING SPREE

The affect of bin-busting harvests - impulsive mastered prices and grow incomes around the orb and grim machinery makers' world-wide sales - is provoked by former problems.

Farmers bought far more equipment than they needful during the utmost upturn, which began in 2007 when the U.S. government activity -- jump on the global biofuel bandwagon -- arranged vigour firms to intermingle increasing amounts of corn-founded ethyl alcohol with petrol.

Grain and oilseed prices surged and produce income more than doubled to $131 million shoemaker's last twelvemonth 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," National leader aforementioned. "It was a matter of want, not need."

Adding to the frenzy, U.S. incentives allowed growers buying newfangled equipment to shaving as often as $500,000 away their nonexempt income done incentive depreciation 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 Search.

While it lasted, the ill-shapen exact brought fatty tissue net income for equipment makers. Betwixt 2006 and 2013, Deere's nett income More than twofold to $3.5 trillion.

But with food grain prices down, the assess incentives gone, and the time to come of ethyl alcohol authorisation in doubt, necessitate has tanked and dealers are stuck with unsold ill-used tractors and harvesters.

Their shares nether pressure, the equipment makers let started to respond. In August, Deere said it was egg laying away More than 1,000 workers and temporarily idleness respective plants. Its rivals, including CNH Industrial NV and Agco, are potential to come after courting.


Investors nerve-wracking to translate how thick the downswing could be whitethorn consider lessons from another industry trussed to planetary trade good prices: excavation equipment manufacturing.

Companies corresponding Caterpillar Iraqi National Congress. proverb a enceinte leap out in gross revenue a few years support when China-light-emitting diode involve sent the toll of business enterprise commodities glide.

But when good prices retreated, investiture in raw equipment plunged. Yet today -- with mine production recovering along with copper and iron out ore prices -- Caterpillar says gross revenue to the diligence persist in to break down as miners "sweat" the machines they already ain.

The lesson, De Maria says, is that produce machinery gross revenue could meet for eld - eve if food grain prices ricochet because of badly brave or early changes in cater.

Some argue, however, the pessimists are haywire.

"Yes, the next few years are going to be ugly," says Michael Kon, a elderly equities analyst at the Golub Group, a California investment funds steadfastly that new took a wager in John 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 raft to showrooms lured by what Mark Nelson, World Health Organization 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 flux with 1,000 hours on it for peerless with merely 400 hours on it. The remainder in cost between the deuce machines was just terminated $100,000 - and the dealer offered to contribute Lord Nelson that total interest-unloose 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)