In the latest episode we look at Deere's first quarter earnings announced this morning, whether or not 2016 could be a tough year for Deere and other manufacturers, the importance of agronomics at the dealership level, if there is any bullish news on the horizon and the Kansas City Fed’s latest report on net farm income.

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I’m managing editor Kim Schmidt, welcome to On The Record. Here’s a look at what’s currently impacting the ag equipment industry.

Deere Releases 1Q Earnings

This morning Deere reported that its net sales for its first quarter of 2016 fell by 13%. Worldwide net sales were $5.5 billion compared with $6.4 billion last year. Net sales of the worldwide equipment operations declined 15% for the quarter. In the U.S. and Canada, sales decreased 18% percent, and sales for the rest of the world were down 11%.

Company equipment sales are projected to decrease about 10% for fiscal 2016 and to be down about 8% for the second quarter compared with the same period a year ago. Included in the forecast is a negative foreign-currency translation effect of about 3% for the full year and second quarter. For fiscal 2016, Deere’s net income is forecast to be about $1.3 billion.

Will 2016 Be the Trough for Deere?

A recent report from Avondale Partners suggests that this year may mark the cyclical trough for Deere.

Igor Maryasis, senior research analysis at Avondale, said in a note that by their calculations NAFTA large ag equipment industry sales expectations currently factored in to Deere’s 2016 guidance already seem to imply levels that are close to the troughs reached in the last three down cycles.

Because of under production in 2015 and 2016, Maryasis says Deere can more or less maintain its 2017 large ag NAFTA production levels unchanged from the prior year even if retail demand declines by as much as double-digits.

On the other hand, if the industry’s 2017 retail sales stabilize around 2016 levels, Deere’s production would have to increase by double-digits just to catch up to retail demand, he says.

The firm’s current consensus assumes Deere’s Ag & Turf sales grow by about 1% in 2017. This would imply a potentially high single digit decline in retail sales for NAFTA large ag next year on top of the 25-30% drop Deere is projecting for 2016.

Maryasis says, “Historically, equipment sales have been closely correlated with Net Cash Farm Income. For 2016, USDA is now projecting Net Cash Farm Income to drop by 2.5% after declining 27% in 2015.

Given the historical correlation, it appears that Net Cash Farm Income would need to deteriorate further beyond the projected 2016 levels for the industry retail sales to decline by more than what is already baked into the current consensus for Deere in 2016 and 2017.”

Linda Salem, president of Great Plains, expressed similar sentiments regarding the tillage and planter manufacturer during the AEM Executive Panel at the National Farm Machinery Show last week.

Salem says their dealers are retailing equipment at a faster pace than they are reordering it, but you can only do that so long before you have nothing to sell. Based on the supply on hand at dealerships, she says they are about to hit equilibrium of the pre boom days or the old normal.”

Salem says 2016 will likely be a normalizing year for Great Plains and if commodity prices and business stay the same in 2017 they ought to see an uptick in sales.

Dealers on the Move

This week’s Dealer on the Move is Castongia Tractor.

John Deere dealership Castongia finalized its acquisition of A&M Farm Center’s two locations in Crown Point and Valaraiso, Ind. This brings Castongia’s total stores to 5.

Deere’s Agronomic Evolution

With increasing emphasis on the agronomic value of precision farming technology, partnerships between farm equipment manufacturers and data-driven service providers continue to emerge.

Earlier this month, John Deere announced its collaboration with California-based Agrian to deliver the company’s Prescription Creator platform. Starting this spring, the software will allow farmers to import, track and manage seeding and fertilizer prescriptions through Deere’s online Operations Center portal.

While the addition of agronomic expertise is a relatively new concept for many farm equipment dealers, it is an area that Deere is continuing to develop throughout its dealer network. This is especially true in markets where there is an agronomic void that the manufacturer is encouraging dealers to fill.

At last week’s National Farm Machinery Show in Louisville, we caught up with Deere product manager Laura Donaldson who shared the company’s plan for future integration of agronomic service into its dealerships.

“Most of our dealerships in the future, we’re asking them to have a certified crop advisor on staff and the reason for that isn’t because we want to enter that agronomy business, that agronomic space. But we want to make sure…I mean our equipment is agronomically advanced. So we want to make sure there’s someone at every dealership that’s able to be a part of those conversations and that can help with those conversations with their customers.”

While Donaldson notes that Deere’s primary focus will remain on machinery, she adds that dealers are being trained and prepared for the addition of agronomic service and in the future, she expects that equipment sales will be driven by precision technology.

Bullish News on the Horizon?

Last week at the National Farm Machinery Show in Louisville, Ky., we had the chance to sit down with Steve Nicholson of Rabo AgriFinance. One question we're regularly asked is if we’ve heard any good news out there. Nicholson offered some insights on any bright spots there might be.

“Probably the best news is we’ve probably thrown all the bearish factors of the market that we can whether it’s corn, soybeans or wheat, there’s probably not a lot bearish factors yet to come. So I would tell you that the bottom line is that we’ve pretty much hit the lows and we put those lows in. But the other side of that coin is so what’s the bullish news?

“And there probably isn’t a lot of bullish news out there at this point. We continue to raise a good crop this year, and now it’s early here in February and it’s hard to decide with that but the fact is we’re probably going to continue to build stocks over the next year or more. So it’s probably limiting the upside to the commodity prices.

“The other side that is a little difficult to try and get a handle on is prices look like they are going to be pretty flat for an extended period of time and that’s going to create not a lot of opportunities for the upside or the downside whether you’re a seller or a buyer of grains going forward. It’s going to be a very difficult time and we’ve got some pretty stiff headwinds ahead of us as far as agriculture goes."

Farm Economy Continues to Tighten

The Federal Reserve Bank of Kansas City released the results of its fourth quarter Survey of Agricultural Credit Conditions last week. In the fourth quarter, 87% of survey respondents said farm income was lower than a year ago.

In fact, it was the first time since 2002 that bankers in all states covered by the district reported farm income for the fourth quarter was lower than the year before.

According to the report, persistently low prices for ag commodities remained the primary driver of reduced farm income. A sustained weakness in corn, soybean and wheat prices has had a particularly negative effect on farm income in the region because these three crops account for 70% of harvested crop acreage in Tenth District states, according to USDA.

What’s happening in the Tenth District appears to be consistent with the national average. In USDA’s most recent Farm Sector Income & Finance report, it’s projecting net farm income for U.S. farmers to decline for the third year in a row.

USDA forecasts net cash farm and net farm income for 2016 to be $81.1 billion and $48.9 billion, respectively, in inflation-adjusted dollars.

These amounts are both below the 10-year average. While production costs are forecast to contract in 2016, it won’t be by enough to offset the commodity price declines that are expected as well.

Implement & Tractor Archives

The concept for the Farmall F-12 One-Row Corn Picker came in 1921 from engineer Bert Benjamin, who suggested the design of a Fordson-like tractor with more ground clearance and a narrow front end for cultivation and plowing. He could not get either Ford or Harvester to build the design at the time. More than 10 years later, the F12 was built almost exactly to his specifications in 1934. 

We always welcome your feedback. If you have any comments or story suggestions, you can send them to kschmidt@lessitermedia.com. Thanks for watching, I'll see you next time.