DEL.ICIO.USLean harvest for Duluth-based tractor company
The Atlanta Journal-Constitution
Friday, March 06, 2009
Thanks to higher farm income fueled by the corn-derived ethanol trend, agricultural equipment manufacturers enjoyed a bumper crop of profits these last few years.
Now, as the world economy slows, some companies, like Duluth-based AGCO Corp., are bracing for leaner harvests.
AGCO Corp./Robert Allen
Duluth-based agricultural equipment maker AGCO Corp. launched a new line of tractors designed to compete in the row crop segment in February. The tractors, which retail for $180,262 to $225,081 and have been in the works for five years, are designed to meet the international fuel emissions standards set to go into effect in 2010.
Investors have responded in kind, sending agricultural equipment stocks — including AGCO’s — plunging to double-digit lows.
Against that backdrop, AGCO’s launch last month of a new, eco-friendly line of tractors geared toward farmers of large row crops could be viewed as ill-timed. But despite expectations of a tough sales year, AGCO officials and at least one analyst believe that the ag sector should hold up relatively well, compared with other industries.
The project, five years in development, aims to build AGCO’s North American market share in a segment dominated by Deere & Co. and the Case IH subsidiary of CNH Global.
AGCO spent months meeting with farmers, having them critique the prototypes. The company widened the passenger, or so-called “buddy seat,” increased leg-room, and improved on soundproofing the cab based upon farmer suggestions.
Designed to comply with diesel fuel emissions standards that go into effect next year, the new line — which will retail for $180,262 to $225,081 — cuts fuel consumption by 15 percent, the company says. For example, a farmer who consumes gallons of fuel an hour and drives 600 hours annually could save almost $1,460 a year, AGCO estimates.
“We look to grow our market share in the segment two to three percentage points in 2009,” said Todd Stucke, vice president of professional producers and the executive in charge of the new line.
But AGCO’s launch comes amid a global economic slowdown that has agricultural equipment manufacturers being cautious about near-term prospects and leaving investors jittery.
Following a year where the company’s profit soared 62 percent to $400 million, AGCO warned sales in 2009 would fall at least 7 percent. And despite industry reiterations that long-term outlook remains good, investors have punished agricultural-related stocks.
In the last year, AGCO shares have fallen more than 77 percent.Shares of Deere & Co. and CNH Global are down 71 percent and 88 percent, respectively, over the last year.
Farmers themselves aren’t going to be as flush with cash, either. Prices for grain and soybeans have dropped roughly by half from where they were last year, cutting into expected farm incomes. And while demand for corn remains high, thanks to the bio-fuel market, conventional gasoline prices have stabilized as petroleum costs have come down.
As it is, the U.S. Department of Agriculture forecasts that farm incomes in 2009 will recede 20 percent from the prior year, though it will remain about 10 percent higher than the preceding 10-year average.
Nevertheless, AGCO executives believe launching the new line now still makes sense.
“We are still optimistic; we have a very strong order book,” said Martin Richenhagen, AGCO’s chairman and chief executive officer, in a recent interview. Admittedly, the company concedes it may not sell as many as its internal forecasts suggested. But Richenhagen expects investment in new farm equipment, particularly from the professional and corporate farm segment, will remain robust.
“Small farms or the segment we call ‘lifestyle farming,’ this part of the business is expected to be down, while the professional segment is expected to be up or stable,” Richenhagen said. “2009 will most probably not be as good as 2008 but still a good year.”
One analyst agrees that agricultural equipment makers should fare better in this economic crisis than other industries, particularly because farmers’ are in financial good shape, which could lead to continued demand for new equipment.
“Farmer balance sheets also remain impressively robust with farm debt-to-equity levels at 40-year lows,” Morningstar analyst John Kearney wrote in a research report issued last month. “The strong financial position of most farmers should allow the agriculture sector to weather the credit downturn better than many other industries, in our opinion,”
Another factor: Though the overall banking sector has been battered from the fallout related to the housing and mortgage meltdown, institutions that finance farm equipment weren’t swept up in Wall Street’s woes so they shouldn’t be as restrictive with credit. What’s more, Kearney wrote, the agricultural equipment makers themselves have finance units with strong balance sheets, which also should lead to the freeing up of capital.
Those points underscore why AGCO believes the moves it’s making now will only help it when the market turns.
And though fuel cost isn’t the monster factor it was at the peak last July, the company says efficiency is still important to farmers, something Stucke said will fuel demand.
The company’s confidence also comes from a more practical belief, Stucke said. “We all have to eat. If you have to eat and feed the world there’s going to be demand for farm equipment.”
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