A Longer View of Ag Equipment
- North American Tractor Market in Units: Looking back, North American agricultural equipment has had quite a run since the period of underinvestment in the 1980s.
- Increasing Horsepower & Productivity: Tractors have increased in horsepower at roughly 3% a year for some decades and a high-end tractor today is roughly 50% more productive than it was 10 years ago, according to Deere. If the unit sales are horsepower adjusted, the recent gains in equipment sales become even more noticeable.
- At the Trough (FY 1986): “Depressed conditions in the North American agricultural industry continued in 1986, as retail demand for farm equipment declined for the fifth consecutive year….The Company’s sales and production were significantly lower in 1986, and the level of North American dealer inventories of farm equipment was reduced considerably.” DE FY1986 10K
- At the Last Peak (FY 1975): “Retail demand for large farm tractors and harvesting equipment for wheat, corn and soybeans remained very strong during 1975….More recently world prices for food and feed grains and other agricultural commodities have increased sharply….causing additional acreage to be brought back under consolidation.” – DE FY1975 10K
- Closer to Peak? (FY 2012): “Relatively high commodity prices and strong farm incomes are expected to continue supporting a favorable level of demand for farm machinery during the year .…Industry sales for agricultural machinery in the United States (U.S.) and Canada are forecast to be about the same for 2013 in relation to the prior year’s healthy levels” – DE FY2012 10K
- DE v. AGCO: We spent time earlier this year pursuing AGCO (which reported this morning) as an alternative to Deere. AGCO has much less exposure to the US market, which we view as closer to peak demand than trough. While European tractor sales may be less “toppy,” the market has bounced and is heavily and awkwardly subsidized, among other problems. If we had to make a bet for the next 5 years, we would guess that AGCO outperforms DE. Fortunately, we don’t have to bet – at least not yet.
- No Easy Call: Current sales of combines and tractors are likely well above replacement demand. The North American Ag equipment market could boom for years more, driven by greater use of biofuels, high commodity prices, aging farmers, healthier farmer balance sheets and other factors. We suspect that is what is priced into many of the Ag equipment share prices. However, history suggests that tractor sales could stagnate or even decline in coming years. That risk does not look priced in. We find it easier to get on board with depressed cyclicals that are showing signs of recovering and are in great industries. That is where we usually find value. DE and AGCO both have strong franchises in consolidated, well-structured industries. However, from a cyclical perspective, we have a tough time getting on board and that excludes the uncertainty from currencies, crop prices and exports discussed here.
Bonus from DE 1975 10K: “It is believed that coal and electricity will become more important fuels in the future, and coal has been substituted for natural gas in a number of operations.” How times change.