Deere & Company, the maker of John Deere farm equipment, said today that 2015 will be a tough year. The firm predicts it will sell fewer big machines to farmers thanks to a slump in crop prices.
The price tags for the company’s farming equipment can reach well into the $200,000 to $300,000 range, and sales had been good. Net income attributable to Deere & Company in fiscal year 2013 was $3.5 billion (up from $3 billion in 2012), as the company rode a boom cycle in soybean and corn prices.
“A lot of farmers were flush with cash and they traded for new equipment,” says John Hawkins of the Illinois Farm Bureau. Farmers were aiming to meet increasing demand from an industry boom in corn and soybean prices.
“Farmers really geared up and spent a lot on their capacity to farm,” says Lawrence De Maria, co-group-head of global industrial infrastructure for William Blair & Co.
The boom cycle, which began in the early 2000s, was fueled by demand from emerging markets and fuel-emission standards that required more corn for ethanol.
“We’ve seen corn that’s dedicated to ethanol go from under 10 percent to almost 40 percent of the most recent crop, so that’s led to a tremendous boom,” says Morningstar Analyst Kwame Webb.
But the EPA is now considering lowering the amount of ethanol that was supposed to be required for 2015. When it announced the idea earlier in 2014, the news began to dampen ethanol demand.
“So the reality is you did have an industry sort of build itself up for greater ethanol consumption than what materialized,” Webb says.
Add to that favorable weather this year, and the supply of corn – as well as soybean – is exceeding demand. Corn prices have dropped by 50 percent, and farmers are getting more conservative with their equipment purchases, Hawkins says. “They’re going to keep that combine or tractor a year or two longer than they probably thought they would.”
In addition, a tax deduction known as Section 179 expired in 2014 (along with many others). It had allowed farmers to deduct equipment purchase expenses. Whether those deductions will be extended for the 2014 tax year is now in limbo, but it’s already had the effect of making farmers less willing to take the risk on new equipment, says Hawkins.
“I’ve been hearing, personally, from implement dealers that that’s the first thing the farmer will say is: Well, I don’t have that Section 179 expensing available, so I’m not willing to trade in right now for a new combine or a new tractor,” Hawkins says.
The oversupply of crops and the decreased demand for them and for farm equipment spells trouble for John Deere, which reported a 20 percent fiscal fourth-quarter drop in profit from a year ago. The company believes industry sales for agricultural machinery in the U.S. and Canada could decline 25 to 30 percent in 2015.
“The slowdown has been most pronounced in the sale of large farm machinery, including many of our most profitable models,” Samuel R. Allen, company chairman and chief executive officer, said in a news release about the company’s fourth-quarter earnings.
“If you say that this is a bust, then they believe the forecast they’ve put out there represents pretty much the worst of the bust,” Webb says.
The decline in sales also highlights John Deere’s previous successes in building up during the boom cycle, says De Maria, who adds that the company will have little choice but to wait out the downturn.
“Certainly when it is a cyclical company, and the farm economy is cyclical … they’re susceptible to those declines as well,” De Maria says.
The decline could last a long time, says De Maria. He points to the late 1990s and a downturn he says lasted six to seven years.
“There’s only two ways to get out of a supply situation like we are in now, and that’s an upward increase in demand or a supply event, such as a weather event. And neither one of which we see right now” De Maria says.