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Equipment Sales Will Continue to Decline Next Year, Analyst Says
Farmers aren't the only ones feeling the pinch of lower grain and oilseed prices.
Deere & Co., AGCO, and other large equipment manufacturers are seeing sales decline and profitability slip as farmers, in general, have less money to spend on new combines, tractors, and trailers.
Corn prices dropped about 8% and soybean futures declined about 16% in 2015. Chicago wheat futures fell by about 5%. Weakness in global commodity prices will likely lead to a similar decline – from 5% to 10% – in sales for manufacturers of large agricultural equipment, analysts said.
“Farmers as a whole are going to be concentrating on how to save a little bit on the bottom line,” said Jason Britt, the president of brokerage Central States Commodities in Kansas City, Missouri. “If they’re on the fence a little bit about purchasing something, they might be likely to hold off a little bit.”
Net farm income is forecast to have dropped 38% in 2015 to $55.9 billion, the lowest level in more than a decade, as crop, dairy, and livestock markets declined, the U.S. Department of Agriculture Economic Research Service predicted in November.
Growers may avoid large purchases in 2016, waiting to see whether any weather or geopolitical events push up prices.
Falling sales and layoffs
John Deere is already feeling the pain. The company said in a quarterly earnings report in November that sales in 2015 fell 20% from the prior year to $28.9 billion. Revenues in 2016 are expected to decline another 7%.
Citing the revenue decline, Deere laid off more than 200 workers from its seeding and cylinder operations in Moline, Illinois, in November and in December announced it would let 45 employees go from its Waterloo, Iowa, facility.
AGCO, the maker of Massey Ferguson equipment, said sales in the first nine months of 2015 totaled about $5.5 billion, down 24% from the same time frame a year earlier. The company expects total sales in 2015 between $7.5 billion and $7.6 billion, below 2014 levels, thanks to the decline in farm income. “Lower industry demand for farm equipment across all regions and the unfavorable effect of foreign currency translation are expected to continue to negatively impact AGCO’s sales and earnings for the remainder of 2015,” the company said in October.
Farmers tighten their belts
After almost a decade of unprecedented profitability, growers are looking to tighten their belts to ride out the storm, said Kwame Webb, a senior equity analyst at Morningstar in Chicago, who covers large-equipment manufacturers and forecasts sales down 5% to 10% in 2016.
“Borrowing by farmers in aggregate is starting to tip up recently, so there’s less money to go around,” he said. “Also, the fleet is very young. There's been a lot of new equipment purchased in recent years, so with diminished finances and relatively young equipment in the field – both of those factors have conspired to lessen demand for new equipment.”
Some manufacturers offered discounts earlier in the year, but nothing like those seen in lean years in the past. It’s likely that companies such as Deere and AGCO are attempting to ride out the storm and, like farmers, hope for higher prices.
Growers have options, said Central States’ Britt, whose family owns a large farm in central Missouri. They could, for example, share equipment, but being an independent bunch, that doesn’t always work as well in practice as it does in theory, he said.
“Equipment sharing works well on paper, but most farmers you talk to – they like their own equipment,” Britt said.
Not all growers are stopping purchases in 2016. Some growers had a decent enough year and have old enough equipment that they could potentially buy new equipment, said Rodney Weinzierl, the executive director of the Illinois Corn Growers Association, who farms about 500 acres near Stanford. Some growers also hedged and marketed well, and they’ll have enough to purchase new tractors or combines should they need them, he said.
Farming is cyclical in nature, Weinzierl adds, meaning some growers are used to weathering financial headwinds. Still, most growers can live through a year or two of losses, so 2016, from an equipment-purchasing perspective, will be worse than 2015. And, he said, it’s not difficult to hold off purchasing a $250,000 piece of machinery when the one you have is only a couple years old and in good working condition.
“Equipment is an easy decision to make,” he continues. “Phosphate and potassium are easy decisions to make, so in a year or two we’ll see those decline. Seed is a hard decision to make because you need seed, so when a farmer has to hold off on making purchases, the first things they don’t buy are equipment, P, and K.”
On his own farm, Weinzierl said, he’s made a couple of purchases but likely won’t be in the market for any equipment in 2016. As with most producers suffering from low corn and bean prices, he’s going to take a wait-and-see approach to which direction the markets go.
“We updated because we saw it as a good buying opportunity, but we won’t be doing any more updating for a year or two,” Weinzierl said. “We’re looking a lot harder at costs, especially the costs we can control.”