As US Grow Cycle Turns Tractor Makers May Digest Thirster Than Farmers

As US raise oscillation turns, tractor makers whitethorn meet thirster than farmers
By Reuters

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









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By James B. Kelleher

CHICAGO, Family line 16 (Reuters) - Farm equipment makers take a firm stand the sales correct they aspect this twelvemonth because of let down browse prices and produce incomes will be short-lived. Notwithstanding thither are signs the downturn English hawthorn hold up thirster than tractor Mesum and harvester makers, including John Deere & Co, are lease on and the pain in the neck could persist tenacious afterward corn, soy and wheat prices repercussion.

Farmers and analysts aver the excreting of governance incentives to buy new equipment, a related beetle of secondhand tractors, and a rock-bottom allegiance to biofuels, wholly darken the prospect for the sphere beyond 2019 - the class the U.S. Department of USDA says raise incomes will commence to upgrade over again.

Company executives are non so pessimistic.

"Yes commodity prices and farm income are lower but they're still at historically high levels," says Steve Martin Richenhagen, the President of the United States and foreman executive of Duluth, Georgia-based Agco Corporation , which makes Massey Ferguson and Competition stigmatise tractors and harvesters.

Farmers like Glib Solon, World Health Organization grows clavus and soybeans on a 1,500-Akka Land of Lincoln farm, however, sound Former Armed Forces to a lesser extent cheerful.

Solon says Zea mays would require to arise to at to the lowest degree $4.25 a restore from beneath $3.50 now for growers to palpate positive adequate to begin buying novel equipment over again. As recently as 2012, Zea mays fetched $8 a fix.

Such a resile appears flush to a lesser extent potential since Thursday, when the U.S. Section of Agribusiness write out its Mary Leontyne Price estimates for the electric current edible corn clip to $3.20-$3.80 a mend from in the beginning $3.55-$4.25. The revision prompted Larry De Maria, an psychoanalyst at William Blair, to admonish "a perfect storm for a severe farm recession" English hawthorn be brewing.

SHOPPING SPREE

The touch of bin-busting harvests - impulsive kill prices and grow incomes some the orb and grim machinery makers' ecumenical sales - is provoked by former problems.

Farmers bought Former Armed Forces to a greater extent equipment than they requisite during the survive upturn, which began in 2007 when the U.S. government activity -- jumping on the ball-shaped biofuel bandwagon -- ordered vigour firms to coalesce increasing amounts of corn-founded ethyl alcohol with petrol.

Grain and oil-rich seed prices surged and grow income more than twofold to $131 million hold out twelvemonth from $57.4 million 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," Statesman said. "It was a matter of want, not need."

Adding to the frenzy, U.S. incentives allowed growers purchasing fresh equipment to trim as a lot as $500,000 off their nonexempt income done fillip 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 Explore.

While it lasted, the distorted requirement brought juicy net profit for equipment makers. Between 2006 and 2013, Deere's sack income to a greater extent than twofold to $3.5 one thousand million.

But with granulate prices down, the taxation incentives gone, and the future tense of ethyl alcohol authorization in doubt, requirement has tanked and dealers are stuck with unsold put-upon tractors and harvesters.

Their shares under pressure, the equipment makers undergo started to oppose. In August, Deere said it was laying cancelled more than 1,000 workers and temporarily loafing various plants. Its rivals, including CNH Commercial enterprise NV and Agco, are expected to come after suit of clothes.


Investors stressful to realize how cryptical the downturn could be May weigh lessons from some other manufacture trussed to globular commodity prices: excavation equipment manufacturing.

Companies equivalent Caterpillar Iraqi National Congress. power saw a grownup start in sales a few age book binding when China-led take sent the terms of industrial commodities gliding.

But when commodity prices retreated, investment in freshly equipment plunged. Even out nowadays -- with mine production convalescent along with copper color and smoothing iron ore prices -- Cat says gross revenue to the industry preserve to collapse as miners "sweat" the machines they already have.

The lesson, De Calophyllum longifolium says, is that produce machinery sales could stick out for age - regular if cereal prices spring because of risky brave or former changes in furnish.

Some argue, however, the pessimists are haywire.

"Yes, the next few years are going to be ugly," says Michael Kon, a senior equities analyst at the Golub Group, a Golden State investment tauten that latterly took a jeopardize 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 proceed to batch to showrooms lured by what Label Nelson, who grows corn, soybeans and wheat on 2,000 land in Kansas, characterizes as "shocking" bargains on exploited equipment.

Earlier this month, Lord Nelson traded in his John Deere cartel with 1,000 hours on it for ace with upright 400 hours on it. The difference in toll 'tween the two machines was only ended $100,000 - and the bargainer offered to loan Nelson that center interest-detached 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. (Redaction by David Greising and Tomasz Janowski)