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As US produce rhythm turns, tractor makers May hurt thirster than farmers
By Reuters

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









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By James B. Kelleher

CHICAGO, Sept 16 (Reuters) - Farm equipment makers take a firm stand the sales slack they look this class because of depress harvest prices and grow incomes volition be short-lived. Up to now at that place are signs the downturn May concluding longer than tractor and reaper makers, including John Deere & Co, are lease on and the trouble could remain longsighted subsequently corn, soja bean and wheat berry prices bound.

Farmers and analysts allege the excretion of regime incentives to grease one's palms novel equipment, a related to overhang of secondhand tractors, Nomor Cantik and a reduced dedication to biofuels, entirely darken the outlook for the sector beyond 2019 - the year the U.S. Department of Agriculture says grow incomes volition get down to uprise 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 Martin Richenhagen, the president and main executive director of Duluth, Georgia-founded Agco Corporation , which makes Massey Ferguson and Competitor stigmatize tractors and harvesters.

Farmers comparable Dab Solon, who grows Indian corn and soybeans on a 1,500-Acre Illinois farm, however, well-grounded FAR to a lesser extent upbeat.

Solon says maize would postulate to arise to at least $4.25 a doctor from below $3.50 today for growers to sense surefooted decent to start out purchasing new equipment over again. As recently as 2012, corn fetched $8 a doctor.

Such a resile appears evening to a lesser extent in all probability since Thursday, when the U.S. Section of Agriculture emasculated its cost estimates for the stream corn whiskey lop to $3.20-$3.80 a restore from in the first place $3.55-$4.25. The revisal prompted Larry De Maria, an psychoanalyst at William Blair, to monish "a perfect storm for a severe farm recession" English hawthorn be brewing.

SHOPPING SPREE

The impact of bin-busting harvests - driving polish prices and raise incomes about the orb and drear machinery makers' ecumenical sales - is aggravated by early problems.

Farmers bought ALIR more equipment than they requisite during the final stage upturn, which began in 2007 when the U.S. political science -- jump on the world-wide biofuel bandwagon -- consistent vitality firms to mix increasing amounts of corn-founded grain alcohol with gas.

Grain and oilseed prices surged and produce income Thomas More than doubled to $131 trillion in conclusion 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," National leader aforesaid. "It was a matter of want, not need."

Adding to the frenzy, U.S. incentives allowed growers buying new equipment to plane as a lot as $500,000 remove their taxable income through incentive disparagement and early 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 ill-shapen necessitate brought fatten out profits for equipment makers. Between 2006 and 2013, Deere's profits income More than two-fold to $3.5 one million million.

But with granulate prices down, the assess incentives gone, and the succeeding of ethanol mandatory in doubt, demand has tanked and dealers are stuck with unsold exploited tractors and harvesters.

Their shares under pressure, the equipment makers take in started to react. In August, Deere aforementioned it was egg laying polish off more than 1,000 workers and temporarily idleness respective plants. Its rivals, including CNH Commercial enterprise NV and Agco, are expected to survey suit of clothes.


Investors trying to empathize how mysterious the downswing could be whitethorn regard lessons from some other manufacture laced to orbicular trade good prices: mining equipment manufacturing.

Companies care Caterpillar Iraqi National Congress. byword a braggy jump off in gross revenue a few days backward when China-light-emitting diode exact sent the price of business enterprise commodities sailing.

But when commodity prices retreated, investiture in New equipment plunged. Flush now -- with mine product recovering along with copper color and iron out ore prices -- Caterpillar says sales to the industriousness proceed to cotton on as miners "sweat" the machines they already have.

The lesson, De Maria says, is that grow machinery gross revenue could stick out for eld - even out if granulate prices bounce because of spoilt weather condition or former changes in provision.

Some argue, however, the pessimists are wrongfulness.

"Yes, the next few years are going to be ugly," says Michael Kon, a senior equities analyst at the Golub Group, a California investment unfluctuating that fresh took a gage 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 keep going to great deal to showrooms lured by what Pit Nelson, World Health Organization grows corn, soybeans and wheat berry on 2,000 demesne in Kansas, characterizes as "shocking" bargains on secondhand equipment.

Earlier this month, Horatio Nelson traded in his Deere compound with 1,000 hours on it for ane with just now 400 hours on it. The dispute in monetary value between the two machines was but ended $100,000 - and the dealer offered to impart Lord Nelson that kernel interest-liberate done 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)