Replies to post #5638 on 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.

Etc.‹

[DewDiligence]

Somebody’s wrong about US farm income! On its recent quarterly CC, DE executives said 2012 was a record year, but USDA says 2012 will be down 3% from 2011 due to widespread drought:

http://www.reuters.com/article/2012/11/27/usa-agriculture-idUSL1E8MR4MR20121127

There’s evidently a difference in how DE and USDA are defining the term.

DE expects 2013 US farm income to be 4% higher than 2012 (and a new record); USDA will release its first forecast for 2013 in February.

This section of the Reuters piece above is something everyone can agree on:

High farm income gives producers the cash to update their equipment and pay for seed, fertilizer and pesticides. Their outlays buoy businesses ranging from Deere and AGCO to Monsanto, Syngenta, Potash Corp and Dow AgroSciences.

See #msg-79481841 for a related story.

[DewDiligence]

(DE)—USDA says 2013 US corn acreage will be largest since 1930s:

http://www.bloomberg.com/news/2013-02-21/corn-drop-seen-as-u-s-sows-most-since-1936-commodities.html

This is the paradoxical reason the shares of DE have underperformed the market in the past week or two, despite the USDA’s separate forecast of record-high US farm income in 2013.

The paradox is that, according to DE, US farm income in a given growing season is the single best predictor of DE’s equipment sales in the following season, so the UDSA farm-income forecast for 2013 ought to be highly bullish for DE’s sales in the 2014 growing season in the Northern Hemisphere. However, investors have assumed that the huge US corn harvest in 2013 will cause corn prices to plummet to such a degree that growers will have less money to spend on new equipment. It makes little sense, IMO, but that’s the market!