ANALYSIS: Nothing limps like a Deere

By Micah Maidenberg, Crain News Service

CHICAGO (Feb. 4, 2016) — Adam Watson, a third-generation farmer whose family raises corn and soybeans 20 minutes south of Champaign, Ill., hasn't purchased a new piece of John Deere machinery in about a decade.

If he needs something, he shops the pre-owned market instead. Falling prices for his crops are why he's turned frugal, and why he's likely to stay that way.

“If it's used, compared to a tractor that's brand new and there's a $30,000 differential in price and it does the same job, that's $30,000 in my pocket,” said Mr. Watson, 36, who notes that tax planning plays a big part in equipment investments.

For Deere & Co. Inc., it's a short path from farmers whose incomes have been crushed by plunging commodity prices to lower sales, smaller profits and rounds of layoffs. Thousands of workers have been let go over the past two years as demand for new tractors that can cost $500,000 and other big green machines has dried up. With the world economy slowing and no floor in sight for crop prices, the world's biggest ag equipment maker is staring at a harsh 2016 and perhaps 2017 and 2018, too.

“Deere has revenue headwinds in front of it,” said Michael Shlisky, an analyst at Seaport Global. “The big challenge for them is can they cut costs to keep them at a reasonable margin rate.”

The Moline, Ill.-based company has 1,650 manufacturing workers on “indefinite layoff” in Illinois, Iowa and Kansas, or 17 percent of its unionized U.S. factory workforce. This month it announced another 500 workers in Illinois will be out of work until the summer. “Everybody's always nervous when it's a down economy,” said Rico Diaz, president of United Auto Workers (UAW) Local 865, which represents employees at Deere's factory in East Moline that produces combines.

Deere is grappling with a problem it can't control, one that's hitting competitors and many other industrial companies right now: the down cycle in commodity prices its key customers depend upon.

American farmers received $3.60 in November for a bushel of corn, down 53 percent from the peak in August 2012, according to the U.S. Department of Agriculture (USDA). The price of soybeans fell 46 percent over the same period to $8.68 a bushel, while wheat brought farmers $4.86 per bushel, a 40 percent decline. (November is the latest month for which the USDA has farm income data.)

“It's been hard to market grain above the cost of production,” said Jeff Fisher, 54, who grows corn, soybeans and a few other crops on 1,500 acres in Tolono, outside of Urbana-Champaign.

Net income for U.S. farmers was forecast by the USDA to total $55.87 billion in 2015, 55 percent less than 2013's peak of $123.29 billion.

“The agricultural economy is clearly in a recession; the comparable time to right now is in the late 1990s,” said Larry De Maria, a William Blair analyst in New York. “We're not in a period like in the 1980s, which was not a recession but more of a depression. We're not in that period just yet. It's possible we could get there.”

In previous downturns at home, Deere could rely on emerging economies for growth. But Brazil — a major crop producer and market for its equipment — is in a recession, as has been Russia. China, a key consumer market for farmers here, is grappling with a slowing economy and a weakened currency. The strong dollar also hits U.S. exports. Ethanol production, which buoyed farmers, is slowing. Deere's construction and forestry sales during its last fiscal year slumped 9.4 percent to $5.96 billion.

For its 2015 fiscal year, which ended in October, Deere reported that sales dropped 20 percent to $28.86 billion. Net income plunged 39 percent to $1.94 billion.

Sales will slide another 7 percent in the current fiscal year, while profits will fall another 28 percent to about $1.40 billion, according to company projections. Deere's stock price closed at $74.61 on Jan. 22, down 23 percent from its 52-week high of $97.33 on July 16.

Company spokesman Ken Golden points out in an email that despite “significant weakness” in the global agricultural sector and a slowdown in construction, Deere's sales and income were the sixth highest in its 179-year history. “While the near-term outlook appears difficult, Deere focuses on the long term,” he said.

“We are in a strong position to carry out our growth plans and attract new customers. The world has a growing need for increasing its food supply as well as continuing development of its infrastructure.”

It's a good thing Deere is looking beyond the short term. There's plenty of used Deere machinery for sale right now in North America, according to analysts and dealers. “Demand for new machines and some of the late-model used (machinery) is taking a hit,” said Gary Reynolds, president of Reynolds Farm Equipment, a Deere dealer based in Atlanta, Ind. “We expect our new sales to be down about 35 percent from out peak in 2014.”

Mr. Fisher said he'd like to replace a combine and a planter with new or used ones. But he said he's unlikely to go shopping anytime soon. And until he and other U.S. farmers finally do return to their dealers, Deere's woes will continue.

This story appeared on the website of Crain's Chicago Business magazine, a sister publication of Tire Business.