By Jesse Newman and Bob Tita
For nearly two centuries, Deere & Co. has built equipment to
help farmers plant and harvest their crops. Now, the company's
financial muscle is doing more of the work.
Throughout the Farm Belt, low prices for corn, soybeans and
wheat are putting a strain on U.S. grain farmers, making it harder
to get bank lending to plant a crop, or commit to purchasing
multimillion-dollar fleets of new equipment.
Deere, the world's largest manufacturer of tractors and
harvesting combines, is stepping in to fill the gap. It already
lends billions to finance farmers' purchases of equipment. Now, it
is providing more short-term credit for crop supplies such as
seeds, chemicals and fertilizer, making it the No. 5 agricultural
lender behind banks Wells Fargo, Rabobank, Bank of the West and
Bank of America, according to the American Bankers Association.
Deere has also expanded its leasing program to get the company's
green and yellow tractors into the hands of farmers, even when they
are unable or unwilling to pay hundreds of thousands of dollars to
buy one.
Its financing has helped farmers stay in business while
generating income for Deere during the worst market for machinery
sales in more than 15 years.
Farmers' incomes will decline for a fourth year this year, to
half what they were in 2013, the U.S. Department of Agriculture
projects. And inflation-adjusted debt is at a level not seen since
the 1980s farm bust.
In shoring up the ailing sector, Deere's loans may be helping
draw out the pain for farmers, allowing them to continue to rack up
debt despite a glut of grain world-wide that is keeping a lid on
crop prices. The increase in equipment leasing, meanwhile, is
weakening Deere's own market for sales.
If crop prices remain subdued, "you're just prolonging the agony
and potentially building up [farm] losses instead of cutting the
pain, cauterizing the wound and stanching the flow of financial
blood now," said Scott Irwin, an agricultural economist at the
University of Illinois.
But if poor weather ultimately spurs grain prices higher, Mr.
Irwin said, the risks of farm lending likely would be forgotten,
and Deere could win new or more loyal customers.
Deere said it is responding to greater demand for leased
equipment from farmers and for short-term credit from other
farm-industry manufacturers such as seed companies that are
offering aggressive financing through Deere as a sales
incentive.
"Our core mission is to support sales of equipment," said Jayma
Sandquist, vice president of marketing for the U.S. and Canada for
John Deere Financial, the company's financing unit. "It's a
cyclical industry. We've built a business that we can manage
effectively across all cycles, and our performance would indicate
we can do that."
The financing arm has shielded the Moline, Ill., company from
the worst of the farm slump, keeping factories and dealers intact
and investors satisfied with profits. Despite a 37% drop in sales
of its farm equipment since a record high in 2013, Deere's stock
price is up 72% from its recent low in early 2016 and up 22% since
the start of 2017.
Deere Financial's portfolio of loans and leases, which includes
short-term lending, leasing and multiyear loans for equipment
purchases, totaled $34.7 billion at the end of the company's 2016
fiscal year, in October.
Since 2013, the total value of equipment leases held by Deere is
up 87%. Loans for farm equipment purchases, meanwhile, have fallen
10% since peaking in 2014, reflecting sliding machinery sales.
Short-term credit accounts for farmers -- used for items such as
crop supplies and equipment parts -- are up 38% since the end of
2015. As of early 2017, the bank operation of Deere Financial had
handed out about $2.2 billion. It is close on the heels of the No.
4 agricultural lender, Bank of America, which has about $2.6
billion out.
"Deere Financial is a massive force," said Robert Wertheimer, a
Barclays analyst. Deere, which accounts for about two-thirds of all
the big tractors sold in the U.S., "is able to influence this
market. They have more market power than most companies."
Rob Zeldenrust, senior agronomy manager at North Central Co-op
in Mentone, Ind., said a farmer who grows corn, soybeans and wheat
on 1,000 acres likely would need $250,000 to cover the cost of
seed, fertilizer, chemicals, spraying and fuel for a single growing
season.
Suppliers like Deere can be a lifeline for farmers such as
59-year-old Harry DuRant in South Carolina. Mr. DuRant leases a
tractor from Deere, and has charged seed and chemical purchases to
lines of credit held by Deere and other suppliers. Together with
loans from his local bank, the financing has helped him plant corn,
soybeans, peanuts, cotton and other crops despite losing money for
three years out of the past four. It has helped him weather floods,
a hurricane and total crop failure.
But low commodity prices are making it difficult for Mr. DuRant
to pay off past debts without taking on new ones. "It's a vicious
cycle," Mr. DuRant said, noting that seed companies continually
introduce more expensive, higher-yielding varieties of corn and
soybean seeds that appeal to farmers like himself, despite a global
oversupply of crops and low grain prices. "I buy into it because
I'm a grower, so of course I want to make 150-bushel corn instead
of 120-bushel corn. All we're doing is making the situation
worse."
Supplier credit has long played a role in the financial plumbing
of the U.S. heartland. But it has grown more crucial in recent
years as commercial banks have become choosier, increasing interest
rates and collateral requirements and denying financing for some
farmers altogether.
The volume of new loans for farm operations originated by banks
in the first half of 2017 fell 7% from a year earlier, according to
the Federal Reserve Bank of Kansas City, following a decline in the
first half of 2016. Loan volumes in the second quarter ticked up
slightly, the bank said.
"It used to be you showed up [at a bank] and said you were a
farmer and they said please let us lend you something," said
Illinois farmer Aaron Wernz, noting that several years ago a
$100,000 loan for operating expenses could be secured with a phone
call. "Now they want to make sure their t's are crossed and i's are
dotted."
Nate Franzén, president of the agribusiness division of First
Dakota National Bank in Yankton, S.D., said the number of high-risk
loans at his bank has quadrupled to 12% in the past two years. The
bank is working to restructure debt for some borrowers, and urging
others to sell land or equipment or vacation homes. He has had to
tell a few farmers it couldn't finance them at all.
"As producers get overextended, banks like mine say 'I can't go
any further,' " said Mr. Franzén. " 'We're not going to stick with
you until it's all gone.' "
Agribusinesses such as Monsanto Co., DuPont Co., Dow Chemical
Co. and agricultural co-ops nationwide offer financing on crop
supplies through in-house programs or in partnership with lenders
like Deere and Rabobank.
BASF SE, one of the world's largest suppliers of pesticides to
farms, offers financing exclusively through Deere, and says its
program has expanded in the past five years.
CHS Inc., a large farmer-owned cooperative in the U.S. that
lends widely to farmers, is holding about $250 million in debts
owed by a single farm operation, according to court documents.
Deere's main rival, CNH Industrial NV -- the maker of CaseIH and
New Holland equipment brands -- has also turbocharged its leasing
program.
But Deere has expanded the reach of its financing business well
beyond machinery, and far more than any other manufacturer in the
farm sector. The financing business accounted for a third of its
net income in fiscal 2016, up from 16% in 2013.
Deere's lending arm regularly yields profit margins much greater
than Deere's margins for equipment sales -- in 2016, the net margin
for financial services was 16%, compared with 4.5% for
equipment.
Financing profits have also suffered less during the downturn;
net income from financing activities fell 17% from 2013, while net
income from the equipment business plunged 57% in that period.
But Deere's loan or lease balances more than a month past due
have doubled since 2012 to $434 million at the close of fiscal
2016, according to an annual regulatory filing for a Deere
financial subsidiary for its U.S. business.
The amount of debt Deere said it won't be able to collect has
doubled since 2014 to $103 million, with more than half of that
amount from its crop-supplies credit program.
Losses at Deere's financial arm still remain minuscule relative
to the size of its finance business. The company said mounting farm
debt isn't a significant risk given still-high equity levels -- the
difference between total assets and total debt on farms. "We have
many good customers that can continue to repay and stay consistent
across underwriting," said Deere's Ms. Sandquist.
In the longer term, Deere's aggressive leasing activity
threatens its core business of selling large, high-horsepower
tractors that can cost more than $200,000 a piece, and harvesting
combines priced at more than $500,000.
Deere accelerated its equipment leasing in 2014 when sales
plummeted following almost a decade of rapid-fire purchases by
farmers flush with cash. The leasing business has kept Deere from
having to idle factories and has provided dealers with income from
replacement parts and services for leased equipment.
In turn, it has provided farmers with machines for one to three
years for a fraction of their purchase price, alleviating the need
for loans. A new tractor costing $250,000 can be leased for about
$30,000 a year. That compares with the cost to buy with a loan,
which would require a 20% down payment of $50,000 and more than
$40,000 a year in payments for five years for the remaining
$200,000 with 5% interest.
"What a lease afforded [farmers] was a payment that was
predictable," said Deere's Ms. Sandquist. "We didn't set about a
strategy to use leasing."
At the end of a lease, many farmers have returned their
machinery to dealers, adding to an already oversupplied market for
used equipment. That pushes down the price farmers who own can get
for their used machines, discouraging trade-ins for new models. The
lower prices also erode profits for Deere when the machinery is
eventually sold.
"We see the value of used equipment dropping off," said Cameron
Hurnard of Iron Solutions Inc., which tracks prices for late-model
used farm equipment.
Deteriorating prices for used equipment and the reluctance to
take on more debt are souring many farmers on owning as an
investment to build farm equity, which had been a key selling point
for Deere's high-value machinery.
"I don't believe I'll ever buy again," said Mark Gath, a farmer
in Luverne, Minn., who recently decided to lease four combines and
five tractors from the company instead of borrowing money to buy.
"I don't have a bank looking at me saying: 'You've got $5 million
of equipment debt. What are you going to do?' "
At the end of fiscal 2016, Deere carried leases on farm and lawn
equipment worth $4.8 billion, up 22% from the previous year.
Deere quit offering one-year leases last year when it
experienced a deluge of returned equipment that the company had
originally valued at higher than the market for used equipment.
Eliminating short-term leases pushed down the new-lease volume this
year, but farmers are still taking longer leases. The longer-term
contracts benefit Deere by having farmers pay more of the
machinery's cost through their payments.
Deere executives said they are seeing better prices and
shrinking inventories for used equipment, as well as improving
order volume for new models.
Ms. Sandquist said farmers' interest in leasing is waning as
their appetite for buying grows again. "We are certainly seeing
leasing coming down, and we're seeing stabilization in used
values," she said.
The company increased its equipment sales growth forecast for
the year to 9% from 4% in May, and it cranked up its net profit
outlook to 33% growth, to $2 billion.
The longer low commodity prices persist, however, the less
effective equipment leasing will be at injecting life into the new
machinery market, say some analysts. What Deere has done "spreads
out the pain but it can't eliminate it," said Barclay's Mr.
Wertheimer.
On the other hand, if adverse weather boosts grain prices in the
long run, "then what John Deere is doing is very smart," said Mr.
Irwin, the University of Illinois agricultural economist, about
Deere's overall financing activities. "They're providing the
financial cushion and waiting for bad weather."
Turning farmers like Michael Oliver into buyers again will be
critical for Deere's future.
Mr. Oliver, who farms 32,000 acres near Cadiz, Ky., said he used
to trade in and purchase about $12 million worth of machinery --
seven combines and a dozen tractors -- every year before sliding
crop prices caused him to start leasing three years ago. But he
recently concluded that even that was too costly. He is now
extending warranties on old equipment he already owns, saying:
"We're going to use our own equipment, and it looks like we're
going to be keeping it for a while."
(END) Dow Jones Newswires
July 18, 2017 13:44 ET (17:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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