In a world where heavy equipment sales are stalling due to the housing slump and credit crisis, the farm market is a rarity: a place where demand is still outstripping supply and many customers are still paying with cash.
The question is: How long can the agricultural market shelter the equipment companies from the financial tempest that has slammed into just about every other corner of the global economy, wrecking just about everything in its wake?
In the case of Deere and CNH, the question is especially urgent because the companies also have large construction equipment units, which are already hurting as a result of the worldwide building downturn.
Signs of potential trouble abound. Crop prices have tumbled, prompting some grumbling among famously tight-fisted farmers, whose willingness to buy equipment rises and falls with corn, soybean and wheat prices.
Brazil, until now one of the fastest-growing agricultural markets and a key one for Agco, is feeling the credit squeeze.
Investors have fled the sector faster than cats from a barn fire. Shares of Deere, the world’s No. 1 farm equipment maker, have lost more than 65 per cent in the past six months and Agco and CNH are down as much or more from their 52-week highs.
Terry Darling, an analyst at Goldman Sachs, is among the skeptics. He calls the sector’s outperformance “unsustainable” because “weakness in ag commodity prices is likely to drive farmer income down” and discourage the purchase of new tractors and harvesters, which can cost upward of $300,000.
The companies themselves are upbeat about their outlooks. After CNH reported better-than-expected third-quarter earnings Oct. 22 and raised its full-year forecast, company executives said the strong demand they saw all year from farmers was continuing into the fourth quarter – at least in North America – despite the correction in commodity prices.
The company, which is controlled by Italian automaker Fiat, said North American sales of tractors over 40 horsepower were up 40 to 45 per cent in the first three weeks of October and that sales of harvesters were up 90 per cent in the region during the same period.
In a separate conference call, Fiat CEO Sergio Marchionne said he expected buoyant demand for farm equipment to continue through a “good chunk” of 2009.
Even if the world were to fall into a global recession, Deere remains optimistic about the fundamentals.
At an agricultural conference earlier in October, Marie Ziegler, the company’s head of investor relations, found comfort in psychology and demography.
Abraham Maslow’s so-called hierarchy of needs, a pyramid explaining human behaviour and motivation, puts food at the very base, making it something so basic that people are ready to sacrifice almost everything else to have it, Ziegler explained.
“Maslow’s hierarchy,” she said, “says that the last thing you do is you adjust your food, so we would expect to be much better protected” in a global recession.
But then Ziegler pointed to sheer numbers on the side of agriculture, saying that “over two billion people” were eating better now and their continued consumption made Deere “feel very bullish on the outlook longer term… regardless of what might happen in the near term.”
Unfortunately, hungry mouths do not buy tractors. Farmers do. And those farmers are less flush today than they were just a few months ago.
Prices for their crops have tumbled from the highs of earlier this year. Corn futures have fallen by 49.5 per cent since hitting a record high of $7.65 a bushel in June (all figures US$), soybeans are down 46.9 per cent since hitting a record $16.63 a bushel in July and wheat futures are off more than 29 per cent in the last five months.
If the trend continues, Ann Duignan, an analyst at J. P. Morgan, said she is not optimistic because “farmers are likely to take a more cautious view of spending in 2009.”
One reason for that caution? Duignan estimates that at current prices, U. S. growers will make money in 2009 – but only if they own their land.
At current futures prices, “crops raised on rented property do not yield a profit,” she said.
– Additional reporting for Reuters by Gilles Castonguay in Milan and Mark Weinraub in Chicago