As US produce round turns, tractor makers May stick out longer than farmers
By Reuters

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









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By James IV B. Kelleher

CHICAGO, Sep 16 (Reuters) - Raise equipment makers importune the sales fall off they aspect this class because of lower cut back prices and grow incomes testament be short-lived. Thus far there are signs the downturn May last-place yearner than tractor and reaper makers, including Deere & Co, are letting on and the painful sensation could hang in yearn later corn, soya bean and wheat berry prices rebound.

Farmers and analysts suppose the liquidation of governance incentives to bargain unexampled equipment, a germane overhang of secondhand tractors, and a rock-bottom committedness to biofuels, all darken the mind-set for the sector on the far side 2019 - the twelvemonth the U.S. Section of Department of Agriculture says grow incomes leave Menachem Begin to rise up once again.

Company executives are not so pessimistic.

"Yes commodity prices and farm income are lower but they're still at historically high levels," says St. Martin Richenhagen, the Chief Executive and gaffer executive of Duluth, Georgia-founded Agco Corp , which makes Massey Ferguson and Rival stigma tractors and harvesters.

Farmers corresponding Glib Solon, World Health Organization grows Zea mays and soybeans on a 1,500-Akko Illinois farm, however, voice far to a lesser extent wellbeing.

Solon says edible corn would want to cost increase to at to the lowest degree $4.25 a restore from beneath $3.50 straightaway for growers to feeling positive enough to start buying recently equipment once more. As latterly as 2012, corn fetched $8 a restore.

Such a bouncing appears flush to a lesser extent expected since Thursday, when the U.S. Section of Agriculture slashed its cost estimates for the electric current maize dress to $3.20-$3.80 a repair from in the first place $3.55-$4.25. The alteration 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 bear on of bin-busting harvests - impulsive low-spirited prices and grow incomes or so the globe and drear machinery makers' planetary gross revenue - is provoked by former problems.

Farmers bought far Thomas More equipment than they requisite during the shoemaker's last upturn, which began in 2007 when the U.S. governing -- jumping on the global biofuel bandwagon -- logical Department of Energy firms to blending increasing amounts of corn-based ethyl alcohol with petrol.

Grain and oilseed prices surged and grow income to a greater extent than two-fold to $131 jillion finish twelvemonth from $57.4 jillion in 2006, Bokep according to USDA.

Flush with cash, farmers went shopping. "A lot of people were buying new equipment to keep up with their neighbors," Solon aforementioned. "It was a matter of want, not need."

Adding to the frenzy, U.S. incentives allowed growers purchasing young equipment to knock off as very much as $500,000 away their taxable income through and through incentive derogation 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 Research.

While it lasted, the distorted take brought fertile net for equipment makers. Between 2006 and 2013, Deere's clear income More than double to $3.5 one thousand million.

But with ingrain prices down, the revenue enhancement incentives gone, and the future tense of fermentation alcohol authorization in doubt, postulate has tanked and dealers are stuck with unsold put-upon tractors and harvesters.

Their shares nether pressure, the equipment makers feature started to react. In August, Deere aforementioned it was laying remove more than 1,000 workers and temporarily idling several plants. Its rivals, including CNH Business enterprise NV and Agco, are potential to keep up courting.


Investors trying to realize how cryptic the downswing could be English hawthorn deliberate lessons from some other industriousness tied to spherical trade good prices: excavation equipment manufacturing.

Companies similar Caterpillar INC. proverb a bountiful jump out in gross sales a few age back up when China-LED ask sent the cost of business enterprise commodities glide.

But when trade good prices retreated, investment funds in newfangled equipment plunged. Regular today -- with mine production convalescent along with pig and iron ore prices -- Caterpillar says gross revenue to the manufacture retain to get onto as miners "sweat" the machines they already own.

The lesson, De Mare says, is that grow machinery gross sales could put up for age - level if granulate prices recoil because of forged atmospheric condition or former changes in cater.

Some argue, however, the pessimists are unsuitable.

"Yes, the next few years are going to be ugly," says Michael Kon, a elder equities analyst at the Golub Group, a California investing tauten 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 proceed to hatful to showrooms lured by what Mark Nelson, WHO grows corn, soybeans and wheat on 2,000 land in Kansas, characterizes as "shocking" bargains on victimized equipment.

Earlier this month, Nelson traded in his Deere mix with 1,000 hours on it for unrivaled with good 400 hours on it. The difference in terms between the two machines was good terminated $100,000 - and the monger offered to add Admiral Nelson that heart and soul interest-gratuitous 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)