Tractors and combines should be flying out of U.S. dealerships as farmers desperately need to replace an aging fleet. They’re not, and at the same time, production in Europe is being hampered by supply chain shortages.
Dogged in the past year by trade war uncertainties and low crop prices that kept farmers from ponying up cash, the world’s big machinery companies are now struggling to deal with the ambiguity surrounding a deadly pandemic.
The result: Both Deere & Co. and AGCO Corp. pulled their financial outlooks March 23, and both said they were cutting back operations.
For Deere, the decision comes just a month after it announced an unexpected earnings boost and maintained its annual outlook on early signs of stabilization in the U.S. farm sector.
“The market is pricing in meaningful downside” for machinery companies, “but a global pandemic has not occurred for over a 100 years, thus there is not much precedent to fall back on,” said Mircea Dobre, senior research analyst at Robert W. Baird & Co.
Already, large-tractor sales are 50% below their peak, according to Bloomberg Intelligence. Normally, that would be a sign much-needed buying should occur. Instead, as the U.S. starts shutting down to stem the virus’s spread, Deere said it is reducing some operations and closing others on a temporary basis, even though its industry has been designated in the U.S. as essential infrastructure businesses.
In Europe, production has already been significantly reduced or suspended in several AGCO facilities, the company said in its statement. AGCO blamed that on shortages and constraints in the European supply chain.
Since the virus erupted in China, Deere has had a special crisis team of 10 people meeting daily on its impact. Deere has also booked premium space on charter flights to obtain crucial parts directly from China, the company told Bloomberg in an email.
Weak farm fundamentals and lack of detail on the U.S.-China trade deal are bearish factors for 2020. Longer term, though, the aging fleet and the world’s population growth will be supportive, according to Bloomberg Intelligence. That will make adoption of high-tech and pricey precision agriculture methods and after-market services more important for profits.