Deere to Take Measure of Farm Slump
November 21 2015 - 9:34AM
Dow Jones News
By Bob Tita
As the farm-equipment industry sputters to the end of its worst
sales year since 2009, Deere & Co. will soon provide clues to
how much more pain is in store for the coming year.
Deere, the world's largest seller of tractors and harvesting
combines, plans to report its fiscal fourth-quarter results on
Wednesday. The Illinois-based company is expected to offer a sales
outlook that will set the tone for the farm-machinery industry in
2016. Many analysts foresee a big stepdown in Deere's projection
that would signal a prolonged slump for the sector.
"We know that 2016 is not going to be an up year. The question
is to what extent will the decline continue," said Mircea Dobre, an
analyst in Robert W. Baird & Co. "There's a lot to be cautious
about when it comes to agriculture and Deere especially."
Deere's stock, which closed Friday at $75.48, has fallen about
15% this year.
Demand for farm equipment has paralleled that for machinery used
in mining and oil-and-gas production, which likewise are reeling in
a global commodity slump.
Several years of elevated prices for corn, soybeans and wheat
fattened the incomes of farmers, who in turn bought more equipment
to expand production and improve crop yields. As a result, the
farm-machinery industry held up relatively well through the 2008
recession. But weakening demand, combined with bumper harvests, in
recent years has pushed down grain prices, throwing a wet blanket
over sales of tractors and combines.
Equipment manufacturers and investors alike are plumbing for a
bottom to the slump as a precursor to an upturn in sales.
"People will look for some kind of confidence that 2016 is [the
bottom], but it's still too early to tell," said Joe O'Dea, an
analyst for Vertical Research Partners LLC. "Unit sales volume is
still not where it's been in prior down periods."
The number of high-horsepower, two-wheel-drive tractors sold in
the U.S. and Canada--a market Deere dominates--are on track to fall
about 13% this year to roughly 28,000 tractors, Mr. O'Dea said.
While that tally represents about a 25% drop from 2013's peak, it
still exceeds a long-term sales average of about 26,000 tractors a
year, he said.
During agriculture's last slump in the early 2000s, annual sales
of high-horsepower tractors failed to reach 20,000 for years. By
this measure, the current market is well off a bottom.
Through the first three quarters of Deere's fiscal year, sales
of farm and lawn-equipment sales were off 25% from year-earlier
levels, while operating profit from farm machinery fell 54%. For
the company's fourth quarter, which ended Oct. 31, analysts expect
a similar decline in sales to about $4.5 billion. Overall equipment
sales, including construction and forestry machinery, are expected
to fall by slightly less, with per-share profit for the quarter
contracting by more than two-thirds to 75 cents.
For fiscal 2016, analysts expect Deere's total equipment revenue
to fall 7% to $24.4 billion from the $26.3 billion estimated for
the past year, according to Thomson Reuters
Deere has throttled back on production to ease the glut of
machinery on its dealers' lots and has furloughed assembly workers
to lower its costs. The company has a reputation for being able to
drive costs of out if operations; but a long slump in sales will
make it more difficult to avoid further shrinkage of its margins.
Deere's third-quarter operating margin on its farm-equipment
business slipped more than four points from the prior year to 8.9%
amid a 50% drop in income.
Deere and other equipment manufacturers are hoping to resurrect
federal tax incentives that buoyed equipment sales after the 2008
recession. Farmers were allowed to deduct as much as $500,000 from
their tax-eligible income taxes for equipment purchases up to $2
million and claim an extra-large depreciation allowance on new
equipment. The tax benefits were rolled back at the start of this
year after Congress briefly reinstated them late last year for
equipment investments in 2014. The equipment deduction is now
$25,000.
Supporters of a higher deduction are lobbying Congress and the
Obama administration to make $500,000 deduction permanent.
"It's something we're pushing for very aggressively," said Matt
Turkstra, senior manager for legislative affairs for the National
Federation of Independent Business. "The groundwork has been laid
for a deal this year."
The Week Ahead looks at coming corporate events.
Write to Bob Tita at robert.tita@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
November 21, 2015 09:19 ET (14:19 GMT)
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