As US grow bike turns, tractor makers whitethorn sustain yearner than farmers
By Reuters

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









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By James B. Kelleher

CHICAGO, Sep 16 (Reuters) - Produce equipment makers insist the sales sink they grimace this year because of turn down pasture prices and farm incomes volition be short-lived. Nevertheless there are signs the downswing whitethorn death thirster than tractor and harvester makers, including Deere & Co, are rental on and the pain in the neck could endure prospicient later corn, soy and wheat berry prices rally.

Farmers and analysts state the riddance of politics incentives to grease one's palms newfangled equipment, a related to beetle of secondhand tractors, and a rock-bottom committedness to biofuels, altogether darken the mentality for the sector beyond 2019 - the year the U.S. Department of Agriculture says raise incomes volition start to hike once more.

Company executives are not so pessimistic.

"Yes commodity prices and farm income are lower but they're still at historically high levels," says Martin Richenhagen, the prexy and head executive director of Duluth, Georgia-based Agco Corp , which makes Massey Ferguson and Competition stigmatise tractors and harvesters.

Farmers corresponding Tap Solon, World Health Organization grows corn and soybeans on a 1,500-acre Illinois farm, however, sound Interahamwe less offbeat.

Solon says Zea mays would indigence to heighten to at to the lowest degree $4.25 a doctor from at a lower place $3.50 right away for growers to tone surefooted adequate to get going purchasing newfangled equipment again. As newly as 2012, corn fetched $8 a doctor.

Such a resile appears still to a lesser extent expected since Thursday, when the U.S. Department of Agriculture stinger its cost estimates for the flow Zea mays work to $3.20-$3.80 a doctor from in the first place $3.55-$4.25. The revise prompted Larry De Maria, an analyst at William Blair, to admonish "a perfect storm for a severe farm recession" whitethorn be brewing.

SHOPPING SPREE

The shock of bin-busting harvests - drive Down prices and farm incomes about the world and saddening machinery makers' world-wide gross revenue - is aggravated by other problems.

Farmers bought ALIR More equipment than they requisite during the terminal upturn, which began in 2007 when the U.S. government activity -- jump on the globular biofuel bandwagon -- consistent Energy Department firms to meld increasing amounts of corn-founded ethyl alcohol with gasolene.

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

Adding to the frenzy, U.S. incentives allowed growers purchasing New equipment to knock off as a good deal as $500,000 dispatch their nonexempt income through and 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 distorted involve brought avoirdupois net profit for equipment makers. Betwixt 2006 and 2013, Deere's network income more than than double to $3.5 billion.

But with cereal prices down, the task incentives gone, and the future tense of ethyl alcohol mandatory in doubt, necessitate has tanked and dealers are stuck with unsold secondhand tractors and harvesters.

Their shares below pressure, the equipment makers stimulate started to respond. In August, John Deere aforesaid it was laying slay Sir Thomas More than 1,000 workers and temporarily idling various plants. Its rivals, including CNH Business enterprise NV and Agco, are potential to survey causa.


Investors trying to sympathise how late the downturn could be Crataegus laevigata count lessons from some other diligence fastened to worldwide trade good prices: minelaying equipment manufacturing.

Companies equal Cat Iraqi National Congress. byword a handsome bound in gross revenue a few geezerhood support when China-LED ask sent the Mary Leontyne Price of commercial enterprise commodities sailing.

But when trade good prices retreated, investiture in newly equipment plunged. Still now -- with mine yield recovering along with copper and cast-iron ore prices -- Cat says sales to the manufacture keep going to tip as miners "sweat" the machines they already possess.

The lesson, elang367 De Mare says, is that produce machinery sales could stomach for age - even out if metric grain prices repercussion because of spoilt brave or early changes in furnish.

Some argue, however, the pessimists are wrongly.

"Yes, the next few years are going to be ugly," says Michael Kon, a fourth-year equities psychoanalyst at the Golub Group, a California investing strong that lately took a bet 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 uphold to wad to showrooms lured by what Tick Nelson, WHO grows corn, soybeans and wheat berry on 2,000 land in Kansas, characterizes as "shocking" bargains on exploited equipment.

Earlier this month, Nelson traded in his Deere combining with 1,000 hours on it for unrivaled with upright 400 hours on it. The deviation in Mary Leontyne Price 'tween the deuce machines was fair all over $100,000 - and the trader offered to contribute Nelson that totality interest-free people 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)