The Rising Influence of Rising Affluence

[Rocky3]

From Barron's:

http://online.barrons.com/news/articles/SB52784017629588234037504580172091215954702?mod=BOL_twm_fs

Harvest Time for Farming Shares
American farmers could lose money on corn, soy beans, and wheat for the first time in almost a decade. Trouble for Deere, Potash, and Monsanto.

By BILL ALPERT
September 27, 2014
The price of corn has fallen by two-thirds in two years. Justin Crownover sold half his crop in May, when a bushel traded at a still profitable level of five bucks. Four months later the season's corn supply is looming like a tsunami and the price is down around $3.25. While the Texas Panhandle farmer hopes for a rally, he's thinking of ways to spend less on machinery and fertilizer.

"Are we concerned?" he mused earlier this month as he moved some cows down the road. "Definitely."

For the first time in almost a decade, American producers of corn, soybeans, and wheat might lose money on all three if prices don't rise. The downturn comes on the heels of the most profitable years in most farmers' lives. Coming into this year, every part of the farm economy was on a roll–from seeds and fertilizer to tractors and technology. Farmland had become a must-have asset for the smart-money investor. The same applies to the shares of companies lending a hand in feeding the world, as the population grows from seven billion to over nine billion by 2050. High commodity prices led to vast new acres of corn and soybeans. That spurred sales at machinery makers like Deere (ticker: DE), fertilizer vendors like Potash (POT), and seed and herbicide providers like Monsanto (MON). Eyeing this megatrend, you can understand why many folks stopped thinking that the farm business was cyclical.

...

WITH FARMERS EXPECTING lower profits next year, one of the first expenditures they can cut is capital equipment. The average age of America's tractors and combines is the youngest it's been in decades, thanks to the recent boom years' cash flows, which manufacturers such as Deere encouraged farmers to spend by trading in their tractors annually.

"We were getting a new fleet every year," says Kip Tom, a large grower of corn and soybeansin Leesburg, Ind. "So if we have to own it now for three years, we certainly can."

After two years of growth, the unit sales of high horsepower tractors and combines in the U.S. in 2014 have been dropping every month from 2013 levels, according to the Association of Equipment Manufacturers (see nearby chart).

Greg Peterson has been tracking auctions of used farm machinery since 1989. After a seven-year bubble, his index of used equipment values, which he publishes on his MachineryPete.com Website, started slipping last year, with the decline accelerating over the summer of 2014 for late-model big tractors, combines, and planters. The expiration of accelerated depreciation for federal tax purposes has also slowed sales of new and used equipment, says Peterson.

High-horsepower equipment has been the profit sweet spot for Deere, as well as for CNH Industrial (CNHI), the 2013 amalgam of businesses from Fiat, Case, and New Holland. With Deere's commanding share of the thriving North American farm market, its sales rose in the last five years from $23 billion in 2009 to $38 billion in 2013, while earnings rose from $900 million, or $2.06 a share, to $3.5 billion, or $9.09 a share, in 2013.

Deere already has told investors to expect a 10% sales drop next year. "There are very high levels of used equipment at dealers," says the company's chief Allen "The challenge for us is to get as much of that used equipment through the pipeline, so that dealers get comfortable taking trade-ins."

To that end, Deere announced in August a certified pre-owned equipment program that it hopes will break the log-jam. Allen points out that the company's sales of construction equipment, and even its small tractors for farms, should have a good year, but the importance of big farm machines to Deere's profits can't be overstated.

At the same time, Deere announced 600 layoffs and a production slowdown.

Morgan Stanley's DeBlase rates Deere shares dead money, with a target price of $84, near the current price. But if "large ag" sales drop 29% next year, she fears earnings could sink to near five bucks a share, which at a price/earnings multiple of 15 could drag the stock down to the mid $70s.

One reason for the stock's relative buoyancy amid corn's collapse may be the hope that Deere is the kind of entrenched, well-run business that Warren Buffett, already a shareholder, would acquire at the right price.

...