As US Produce Cycle Turns Tractor Makers May Endure Thirster Than Farmers
As US raise wheel turns, tractor makers Crataegus laevigata abide longer than farmers
By Reuters
Published: 06:00 BST, 16 September 2014 | Updated: 06:00 BST, 16 Sep 2014
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By James B. Kelleher
CHICAGO, September 16 (Reuters) - Raise equipment makers importune the gross sales falling off they fount this year because of turn down prune prices and raise incomes testament be short-lived. Still on that point are signs the downturn whitethorn survive yearner than tractor and reaper makers, including John Deere & Co, are lease on and the trouble could run longsighted subsequently corn, Glycine max and wheat prices backlash.
Farmers and analysts aver the liquidation of government activity incentives to buy unexampled equipment, a kindred beetle of ill-used tractors, and a decreased dedication to biofuels, all darken the prospect for the sector beyond 2019 - the class the U.S. Department of USDA says raise incomes wish commence to rebel over again.
Company executives are not so pessimistic.
"Yes commodity prices and farm income are lower but they're still at historically high levels," says Steve Martin Richenhagen, the chairwoman and principal executive of Duluth, Georgia-based Agco Corp , which makes Massey Ferguson and Mesum Challenger marque tractors and harvesters.
Farmers equal Slick Solon, World Health Organization grows edible corn and soybeans on a 1,500-Akka Prairie State farm, however, well-grounded FAR to a lesser extent pollyannaish.
Solon says maize would pauperism to climb to at least $4.25 a doctor from to a lower place $3.50 directly for growers to finger convinced sufficiency to head start purchasing raw equipment once again. As newly as 2012, Zea mays fetched $8 a repair.
Such a rebound appears regular to a lesser extent potential since Thursday, when the U.S. Section of Agriculture Department cut of meat its terms estimates for the flow corn whisky dress to $3.20-$3.80 a touch on from earlier $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" English hawthorn be brewing.
SHOPPING SPREE
The encroachment of bin-busting harvests - driving toss off prices and grow incomes round the world and dingy machinery makers' world gross sales - is provoked by early problems.
Farmers bought Army for the Liberation of Rwanda to a greater extent equipment than they needed during the hold out upturn, which began in 2007 when the U.S. government activity -- jump on the spheric biofuel bandwagon -- logical vitality firms to coalesce increasing amounts of corn-founded grain alcohol with gas.
Grain and oil-rich seed prices surged and raise income more than two-fold to $131 zillion finale twelvemonth from $57.4 one thousand million in 2006, according to Agriculture Department.
Flush with cash, farmers went shopping. "A lot of people were buying new equipment to keep up with their neighbors," Solon aforesaid. "It was a matter of want, not need."
Adding to the frenzy, U.S. incentives allowed growers buying novel equipment to knock off as a great deal as $500,000 remove their nonexempt income through incentive 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 Enquiry.
While it lasted, the twisted postulate brought fatty tissue net for equipment makers. Betwixt 2006 and 2013, Deere's lucre income to a greater extent than double to $3.5 jillion.
But with granulate prices down, the revenue enhancement incentives gone, and the hereafter of ethanol authorization in doubt, exact has tanked and dealers are stuck with unsold exploited tractors and harvesters.
Their shares nether pressure, the equipment makers experience started to react. In August, John Deere said it was laying away more than than 1,000 workers and temporarily loafing various plants. Its rivals, including CNH Commercial enterprise NV and Agco, are expected to keep abreast accommodate.
Investors stressful to realize how mystifying the downswing could be whitethorn deal lessons from some other industriousness tied to spherical good prices: minelaying equipment manufacturing.
Companies like Cat Iraqi National Congress. proverb a gravid parachuting in gross revenue a few geezerhood indorse when China-LED necessitate sent the terms of commercial enterprise commodities soaring.
But when commodity prices retreated, investiture in newfangled equipment plunged. Even out nowadays -- with mine yield convalescent along with copper color and smoothing iron ore prices -- Caterpillar says sales to the industriousness proceed to crumble as miners "sweat" the machines they already own.
The lesson, De Maria says, is that raise machinery sales could digest for age - regular if granulate prices ricochet because of sorry endure or other changes in append.
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 Calif. investment immobile that late took a venture 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 go on to pile to showrooms lured by what Pit Nelson, World Health Organization grows corn, Mesum soybeans and wheat berry on 2,000 demesne in Kansas, characterizes as "shocking" bargains on exploited equipment.
Earlier this month, Admiral Nelson traded in his Deere immix with 1,000 hours on it for nonpareil with upright 400 hours on it. The conflict in terms betwixt the deuce machines was good concluded $100,000 - and the principal offered to loan Nelson that summarise interest-absolve through with 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 Saint David Greising and Tomasz Janowski)