Dealers: Deere to supply fewer combines

Say demand in U.S. has fallen

By SHRUTI DATE SINGH Bloomberg News Published:

CHICAGO -- Deere & Co., the world's largest manufacturer of agricultural equipment, plans to deliver fewer combines in the United States in fiscal 2012 as demand falls amid a glut of used machinery, dealers say.

Sloan Implement Co., a Deere dealer with 17 sites in Illinois and Wisconsin, said its combine allocation will be reduced by about 10 percent for the year starting Nov. 1. Southard Implement Co., a dealer in Iowa, said it will get as many as 16 machines after selling 27 in 2011. Inventories of used combines, which can cost more than $200,000 each, are "bulging," company owner Larry Southard said.

"The agricultural community has had five years of very profitable times," Southard said in a telephone interview. "These farmers have bought so much equipment. We are saturating the market."

Combines account for about one-third of Deere's North American farm-equipment revenue and are its "highest-margin" products, Stephen Volkmann, a Jefferies & Co. analyst, said in an interview. The United States and Canada form Moline, Ill.-based Deere's largest market.

Ken Golden, a spokesman for Deere, declined to comment on production plans. He said the company won't talk about its outlook for 2012 until after the 2011 fiscal fourth quarter.

U.S. sales of self-propelled combines dropped 16 percent to 1,256 in September from a year earlier, the Association of Equipment Manufacturers said in an Oct. 11 report. The decline in Deere's combine sales last month outpaced the industry as a whole, the company said in an audio commentary on its website.

Deere and Duluth, Ga.-based Agco Corp., which is the third-largest farm equipment maker, may see North American sales drop in the next two years after agricultural incomes in the region peak, Volkmann, who's based in New York, said in an Oct. 3 report.

Deere told dealers it's reducing the allocation of combine production capacity for the U.S. market by as much as 20 percent in fiscal 2012, Andrew Casey, a Boston-based analyst for Wells Fargo Securities, said in a report. Rick Linenburg, the owner of dealer Vincennes Tractor Inc. in Vincennes, Ind., said in an interview he hasn't seen cuts so deep in at least 10 years.

The rally in crop prices four years ago boosted farmers' earnings and released "pent-up" demand for machinery, said Greg Peterson, the founder of MachineryPete.com, a website that monitors prices of farm machinery at auctions. Demand for new combines has been "so good for so long," he said.

Demand for one- to three-year-old combines largely was met by early 2010, Peterson said in an interview. His index tracking the value of used combines fell to 6.7 -- compared with a maximum measure of 10 -- in the second quarter, the lowest since mid-2006. It was 6.9 in the third quarter.

"Downside risk" in markets for large agricultural equipment "could be significant in light of low fleet ages and more aggressive dealer incentive programs, Timothy Thein, a New York-based analyst at Citigroup Inc., said in an Oct. 11 report.

Still, U.S. farm income will jump 31 percent this year to a record $103.6 billion because of higher crop and livestock prices, according to the U.S. Department of Agriculture.

Demand is "hot" for tractors, planters, and tilling and grain-handling equipment, Peterson said. Deere's revenue in the coming year from the U.S. combine market may be similar to 2011 because of price increases, Casey said.

Manufacturers such as Deere have learned to smooth out the cycles and better balance production with demand, Peterson said. Deere is monitoring the used-combine market and says "the level of activity is high, pricing is holding up and inventory bands are within acceptable levels," Jamie Cook, a New York-based analyst for Credit Suisse Group, said in an Oct. 4 report, citing a meeting with Deere management.

Deere's plan is "a pretty smart move," said Tom Sloan, chief executive officer of Sloan Implement. "It keeps up the pricing."

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