Drought Won’t Hurt Equipment Sales

The Wall Street Journal recently reported that farm equipment manufacturers are banking on soaring crop prices to help them weather this historic U.S. drought. Executives at the majors, foresee little disruption for the industry in coming quarters, even as the drought takes a heavy toll on the nation’s corn and soybean crops.

According to the article, executives and analysts expect many farmers to continue investing in new machinery, because record commodity prices and the widespread use of crop insurance in the U.S. will soften the impact of poor harvests on farmers’ incomes.

“We expect this industry, if we see any type of blip, to bounce back very, very quickly,” said Robert Crain, AGCO’s general manager for North America. The major drivers of demand for agricultural commodities, such as world population growth and rising consumption of meat products in countries like China, are “not going away,” said Crain.

Prices for the two largest U.S. crops—corn and soybeans—have soared to all-time highs this summer because of the drought. The record prices will benefit farmers harvesting crops in coming weeks, and will boost payouts for growers who insured their crops against losses. Last month, USDA forecast that net U.S. farm income will rise 3.7% this year to $122.2 billion, the highest level since 1973 on an inflation-adjusted basis.

Because many U.S. farmers wait until after their harvests to invest in new equipment, it is still unclear how the drought will affect domestic sales next year. Some analysts think farmers may delay investments or buy less equipment than they might have without a drought.

Although “the general environment is good” for equipment demand, CNH’s retail-deliveries growth rate may slow in the second half of this year compared with the first, partly because the drought has had a large impact on livestock farmers, said Tobin of CNH. ◆