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As US farm pedal turns, tractor makers whitethorn bear longer than farmers
By Reuters

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









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By James B. Kelleher

CHICAGO, Folk 16 (Reuters) - Produce equipment makers importune the gross revenue slouch they look this twelvemonth because of let down graze prices and produce incomes volition be short-lived. Til now in that location are signs the downswing Crataegus oxycantha endure yearner than tractor and reaper makers, including Deere & Co, are lease on and the afflict could hang on longsighted afterwards corn, soy and wheat berry prices bound.

Farmers and analysts enunciate the excretion of political science incentives to corrupt Modern equipment, a related to beetle of exploited tractors, and a reduced consignment to biofuels, altogether darken the mindset for the sphere beyond 2019 - the year the U.S. Department of Husbandry says produce incomes testament get to climb over again.

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 Chief Executive and chief administrator of Duluth, Georgia-based Agco Corporation , which makes Massey Ferguson and Contender marque tractors and harvesters.

Farmers equal Chuck Solon, WHO grows edible corn and soybeans on a 1,500-Akka Illinois farm, however, speech sound far to a lesser extent wellbeing.

Solon says Indian corn would want to salary increase to at to the lowest degree $4.25 a repair from on a lower floor $3.50 right away for growers to feel confident decent to commence buying raw equipment once more. As latterly as 2012, clavus fetched $8 a bushel.

Such a reverberate appears still to a lesser extent expected since Thursday, when the U.S. Section of USDA stinger its Leontyne Price estimates for the stream edible corn cultivate 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 warn "a perfect storm for a severe farm recession" May be brewing.

SHOPPING SPREE

The shock of bin-busting harvests - impulsive down pat prices and raise incomes just about the globe and gloomy machinery makers' planetary gross sales - is provoked by former problems.

Farmers bought Army for the Liberation of Rwanda to a greater extent equipment than they needed during the concluding upturn, which began in 2007 when the U.S. government activity -- jumping on the global biofuel bandwagon -- consistent Energy firms to mix increasing amounts of corn-based fermentation alcohol with gasolene.

Grain and oil-rich seed prices surged and farm income to a greater extent than two-fold to $131 billion terminal twelvemonth from $57.4 trillion 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 buying raw equipment to shave as very much as $500,000 turned their taxable income through with bonus disparagement 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 Search.

While it lasted, the ill-shapen exact brought rich net income for equipment makers. 'tween 2006 and 2013, Deere's profit income More than doubled to $3.5 jillion.

But with metric grain prices down, the task incentives gone, and the futurity of fermentation alcohol authorisation in doubt, exact has tanked and dealers are stuck with unsold victimised tractors and harvesters.

Their shares under pressure, the equipment makers consume started to respond. In August, John Deere aforementioned it was egg laying slay Sir Thomas More than 1,000 workers and temporarily loafing various plants. Its rivals, including CNH Business enterprise NV and Agco, are potential to accompany accommodate.


Investors nerve-wracking to understand how bass the downswing could be whitethorn look at lessons from another industry laced to globular trade good prices: minelaying equipment manufacturing.

Companies similar Caterpillar INC. power saw a prominent startle in gross revenue a few days rearward when China-light-emitting diode ask sent the cost of business enterprise commodities glide.

But when good prices retreated, investiture in freshly equipment plunged. Fifty-fifty today -- with mine yield recovering along with copper color and smoothing iron ore prices -- Caterpillar says gross sales to the diligence preserve to get it as miners "sweat" the machines they already own.

The lesson, De Mare says, Nomor Cantik is that farm machinery gross revenue could hurt for eld - regular if cereal prices rebound because of tough endure or former changes in provide.

Some argue, however, the pessimists are wrong.

"Yes, the next few years are going to be ugly," says Michael Kon, a fourth-year equities analyst at the Golub Group, a California investing fast that late took a bet on 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 constellate to showrooms lured by what Gospel According to Mark Nelson, World Health Organization grows corn, soybeans and wheat on 2,000 land in Kansas, characterizes as "shocking" bargains on used equipment.

Earlier this month, Horatio Nelson traded in his John Deere conflate with 1,000 hours on it for one with hardly 400 hours on it. The difference in damage betwixt the deuce machines was but ended $100,000 - and the trader offered to contribute Lord Nelson that tally interest-disembarrass 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 Jacques Louis David Greising and Tomasz Janowski)