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Farm equipment maker Deere’s dealers reel from trade war, bad weather
Farm equipment maker Deere’s dealers reel from trade war, bad weather
By Rajesh Kumar Singh
CHICAGO, Aug 9 (Reuters) – When China announced this week that it had stopped buying U.S. agricultural products and might impose additional tariffs on farm shipments from America, Dave Schmidt braced for another blow to his business.
The Salem, Wisconsin-based dealer of Deere & Co’s tractors, planters and combines is grappling with declining sales and higher levels of inventory as farmers have put off equipment purchases in the wake of rain-delayed planting in the Midwest and the yearlong Sino-U.S. trade standoff.
Schmidt says sales at his dealership, in general, declined by as much as 15% in the first half of the year, led by a fall in the demand for large equipment. In a sign of things to come, early orders for planting equipment for next season’s soybean and corn crops are down up to 25%.
He is not alone. Half a dozen dealers of Deere’s agriculture equipment across the Midwest shared similar accounts in interviews with Reuters. One of those dealers, in Geneseo, Illinois, said sales at his dealership were down 50% so far this year from the same period last year.
This is a worrying sign for Deere, which gets nearly 60% of its sales from the United States and Canada. The Moline, Illinois-based company is expected to report lower sales at its agriculture & turf segment when it reports its third-quarter earnings on Aug. 16.
The segment, which accounts for the bulk of the company’s sales, is expected to report quarterly sales of $6.24 billion, compared with $6.29 billion a year ago, according to Refinitiv IBES’ average analyst estimate.
Overall, Deere is expected to report quarterly earnings of $2.88 per share, compared with $2.78 a share in the corresponding period last year. Revenue for the July quarter is forecast to come in at $9.40 billion, up from $9.29 billion last year.
In May, Deere slashed its full-year profit and sales outlook, blaming the U.S. trade war with China for weak demand for its farm machines.
The company’s shares, however, have gained a little over 14% since its last earnings report on hopes that a rally in corn prices would encourage farmers to buy new equipment.
But dealers are not so sanguine.
“We are not expecting demand for planting equipment to come back up this year,” Schmidt said. “We might see more repair and upgrading of the existing equipment.”
Deere has downgraded the estimates for U.S. principal crop cash receipts this year, an important indicator for equipment demand, citing China’s retaliatory tariffs on American imports, which have slashed exports earnings of American farmers.
China imported $9.1 billion of U.S. farm produce in 2018, down from $19.5 billion in 2017, according to the American Farm Bureau, the largest farm industry group in the country.
U.S. shipments to China of soybeans, the country’s most valuable farm export, sank to a 16-year low last year as the Asian nation mostly shifted purchases to Brazil, leaving American farmers with surplus stocks. U.S. soy prices are down 18% since March 2018, when President Donald Trump launched a tariff war on China and other countries.
Deere rival CNH Industrial last week said the shift has driven up its order book for tractors and combines in South America, particularly in Brazil.
A record-wet spring has devastated a wide swath of the U.S. farm belt and inflicted more economic pain on soybean and corn producers, particularly those whose fields were too wet to ever plant, dampening hopes of an improvement in farm income and equipment sales.
HIGHER INVENTORY, PRODUCTION CUTS
To compensate farmers for the market loss due to the trade war, the Trump administration has committed as much as $28 billion in federal aid. The latest tranche of the aid will likely begin to be paid out later this month.
The bailout money, however, is not expected to lift equipment sales.
“We are yet to feel most of the effects of too much water and the lower prices,” said Paul Gilsinger, a Deere dealer in Knox, Indiana. “In the second half of the year, demand could slow down further.”
To prevent a supply glut, U.S. agricultural machine maker AGCO Corp and CNH have slashed production to keep inventory in line with retail demand.
A similar concern prompted Deere to cut production by 20% at two of its large factories in North America.
Yet, Gilsinger expects to be saddled with this year’s inventory next year. To move used machinery, he is offering waivers on interest on equipment financing.
Schmidt’s dealership has been running a similar incentive program. Yet, the inventory turnover ratio for used tractors has doubled, he said.
Adding to the worry, dealers are also encountering an increase in payment delays.
“When you get into a slowdown, it takes a while for demand to build back up,” Schmidt said. “These things don’t change on a dime.” (Reporting by Rajesh Kumar Singh; editing by Joe White and Jonathan Oatis)
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