The Rising Influence of Rising Affluence

[DewDiligence]

High Crop Prices Will Keep Farmers Buying Combines, Tractors

[This effect, which seems to be baffling for some industry analysts, was discussed in detail on DE’s FY3Q12 CC.]

http://online.wsj.com/article/SB10000872396390443589304577635523588509422.html

›September 12, 2012
By OWEN FLETCHER

Farm-equipment makers are banking on soaring crop prices to help them weather a historic U.S. drought.

Executives at Deere & Co., Agco Corp. and other makers of combines, tractors and planters foresee little disruption for the industry in coming quarters even as the drought takes a heavy toll on the nation's corn and soybean crops.

Executives and analysts expect many farmers to continue investing in new machinery, because record commodity prices and the widespread use of crop insurance in the U.S. will soften the impact of poor harvests on farmers' incomes.

"We expect this industry, if we see any type of blip, to bounce back very, very quickly," said Robert Crain, Agco's general manager for North America.

The major drivers of demand for agricultural commodities, such as world population growth and rising consumption of meat products in countries like China, are "not going away," said Mr. Crain, whose company is the third-largest maker of farm machinery in the U.S., behind Deere and Fiat Industrial's CNH Global NV unit.

Prices for the two largest U.S. crops—corn and soybeans—have soared to all-time highs this summer because of the drought. The record prices will benefit farmers harvesting crops in coming weeks, and will boost payouts for growers who insured their crops against losses. Last month, the U.S. Department of Agriculture forecast that net U.S. farm income will rise 3.7% this year to $122.2 billion, the highest level since 1973 on an inflation-adjusted basis.

"The financial health of the farm sector is as strong as it has been in modern times," Deere's chief economist, J.B. Penn, said during an earnings call last month, though he added the full effects of the drought weren't yet clear.

Iowa farmer Michael Sersland, 54 years old, said he ordered a Deere combine last month, after selling corn and soybeans he had stored from last year's harvest, capitalizing on recent record prices. "This year I just kind of lucked out," said Mr. Sersland, whose current combine is 13 years old.

The jump in commodity prices also may stimulate farm-equipment sales outside the U.S., because farmers in Europe and South America will gain extra income from the price increases. The higher prices also are likely to lead farmers in those regions to plant more crops than usual next season.

Latin America "has the potential in the short term to pick up the slack" if equipment demand slows in the U.S., said Richard Tobin, chief executive of CNH Global, the manufacturer of Case IH and New Holland-branded machinery.

Because many U.S. farmers wait until after their harvests to invest in new equipment, it is still unclear how the drought will affect domestic sales next year. Some analysts think farmers may delay investments or buy less equipment than they might have without a drought. Large, high-horsepower tractors typically sell for $250,000, while combines are priced at about $400,000.

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