Bank Expects OEM Mergers, Acquisitions

After several years of rising row crop prices, a “perfect storm” of economic conditions has emerged that may position the industry for new alliances among the majors and an uptick in acquisitions of smaller manufacturers and specialty lines.

Rabobank Group, a worldwide bank that in the Americas offers expertise and strategic counsel to the farming and agribusiness industry, released a report in September titled “Contraction Today, Consolidation Tomorrow?”

The report lays out scenarios for growth among farm equipment manufacturers in spite of current economic challenges.

Rabobank frames the “perfect storm” as high crop production, a sharp correction in grain prices, and contracting farmer margins in mid-2014 resulted in declining purchases of large tractors and combines in North America.

These circumstances have driven down equipment sales, a trend Rabobank expects to continue into 2017.

Ken Zuckerberg, Executive Director and Senior Analyst of Rabobank’s Food & Agribusiness Research and Advisory, group said that in response to the downturn, OEMs are “temporarily suspending production, working closely to reduce inventory levels and attempting to mitigate overhead expenses. Unfortunately, these measures are temporary and defensive, and do not solve the long-term structural challenges associated with lower demand and limited organic growth prospects in a mature market like North America.”

The report offers three consolidation scenarios that may emerge by 2020:

• Mergers among the five largest original equipment manufacturers, excluding market leader Deere. There is a legitimate business case for a competitor of equal size to Deere to materialize after a merger.
• Acquisitions of smaller harvesting and implement equipment manufacturers by those five players as a means to diversify product offerings and achieve operational efficiencies through enhanced scale.
• Horizontal mergers & acquisitions into adjacent markets that are less correlated with crop prices, such as grain storage and animal protein production systems.