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.