Farm Bill Gives Tractor Sales Traction

Dec. 21, 2004
China deal also sparks hope in troubled farm-equipment sector, which is adding new technologies to entice buyers.

Frans Rosenquist, who farms 4,000 acres of wheat, corn and soy beans plus 3,000 acres of peas for Green Giant, just bought his fourth $200,000, 480-horsepower tractor. The Minnesota farmer plunked down the cash because 2002 is looking like a good year to Rosenquist, thanks in part to the passage of the Farm Security and Rural Investment Act (known as "the farm bill"), which returns to a much more generous system of price supports and regulated cultivation -- similar to that which pulled the nation out of the Great Depression. "The government has put a safety net under us," Rosenquist says. The farm bill, though panned by some anti-subsidy groups, has been heralded as a savior to U.S. farmers. "This is the economic recovery package that rural and small-town America needs,'' says Sen. Tom Harkin (D-Iowa), Senate Agriculture Committee Chairman. Besides farmers, the big winners could be manufacturers of heavy-duty tractors, combines and other farm implements, an industry that has been in a slump for the past several years. A survey of agricultural-equipment manufacturers by the Association of Equipment Manufacturers (AEM) shows that the producers expect their customers to be eager to buy farm equipment during the next two years (See "A Brighter Future," below.). "This may turn into the golden age of farming," says Jim Seaver, co-founder of Agco Corp., and its senior vice president of worldwide sales and marketing. The farm bill is expected to cost $190 billion dollars over the next 10 years, raising the total spent on U.S. farm programs to nearly $600 billion. Among other important changes, the bill gives farmers the flexibility to update their subsidy formulas to reflect higher yields. The previous subsidy system penalized farmers for increased productivity. The new measure also includes a $2 billion initiative that encourages farmers to adopt better environmental practices -- more reason to buy new, high-tech, environmentally friendly equipment. But most important of all, the plan provides predictable income for farmers. Last year, U.S. net cash farm income reached a record $60 billion, but at least one-third of it came in the form of emergency government payments. Because farmers didn't know whether they would get the money or not, many held off on big purchases such as heavy-duty tractors. David Raso, a Salomon Smith Barney analyst for the farm-machinery sector, predicts freer spending in the next couple of years. "It's a much better paradigm." That's not the only good news. Farmers and -- by extension farm-equipment manufacturers -- also were gifted with a World Trade Organization (WTO) agreement last December that promises to stabilize trade with China. As part of the conditions under which China joined the WTO, it agreed to cut tariffs and open its markets to more efficient producers of wheat, corn and soybeans. The likeliest beneficiaries are U.S. grain farmers because they can produce these commodities at about half the cost that a Chinese farmer can -- despite enormous wage inequities. U.S. Agriculture Secretary Ann Veneman has estimated that American farmers could sell as much as $2.5 billion more a year to China and Taiwan as a result. Pat Westhoff, an economist with the Food and Agricultural Policy Research Institute at the University of Missouri at Columbia, thinks that estimate could be high, but he does foresee an increased bottom line that could turn into money for equipment. "The China deal is important -- it may not turn the economy on a dime -- but it should produce more money to buy machinery than farmers would have had otherwise," he says. Starting Out Slowly Despite positive signs, this year has not been a big winner so far for two of the three major U.S. tractor manufacturers -- industry behemoth Deere & Co. or No. 2 Case New Holland (CNH), created in 1999 by the merger of Case Corp. and New Holland. The 165-year-old, Moline, Ill.-based Deere had a rough year in 2001, reporting a $64 million loss, despite the fact that U.S. farm income was the highest ever, and the company had introduced 63 new models of farm machinery in a variety of categories. In the first six months of 2002, net sales were down $5 million at $6.509 billion compared with $6.514 billion for the same period in 2001. Robert W. Lane, chairman and CEO, blamed first-quarter losses on "too much inventory, receivables, plant and equipment and other assets -- certainly more than needed to serve our customers well." At French Fiat-owned CNH, the company had lower consolidated revenues the first half of 2002, $5.102 billion versus $5.143 billion in 2001. The company's net loss for the first six months of 2002 was $10 million compared with a net loss of $64 million in 2001, same period. Immediately following the merger that formed CNH two years ago, agricultural economists say, the company failed to make clear to farmers which product lines it would continue to support. Then Deere cut the amount that it would pay for trade-ins of CNH machinery, which further troubled farmers and undercut sales. "They could be great -- but how long are they going to struggle with internal aggregation?" asks Goldman Sachs & Co. farm-machinery analyst Joanna Shatney. Agco is the only one of the big three enjoying a good year so far. Duluth, Ga.-based Agco had net sales of $1.391 million for the first six months of this year compared with $1.191 for the first half of 2001. Shatney says the company's cost-cutting efforts, which include plant closings, are working. And she applauds a deal with Caterpillar Inc. to design, assemble and market Caterpillar's new MT Series of Challenger tractors. She says the agreement improves Agco's product line-up and she thinks the ability to sell through Caterpillar's dealer network is a coup. IT On The Farm All three of the companies are putting a lot of their eggs in the high-tech basket, with Deere leading the way. "We're not selling technology per se. We're selling solutions," says Douglas DeVries, senior vice president of marketing for North America, Asia and Australia. The solutions include making GPS-guidance (global positioning system) standard equipment. Combined with automated steering systems, the GPS technology guides working vehicles in consistent rows for tilling, planting and applying fertilizers. The most sophisticated systems keep the tractor from straying more than one centimeter in either direction, cutting waste to a minimum and saving on labor costs because a farmer who isn't doing the grueling driving himself can work longer hours. Other vehicle navigation options include:

  • Systems that automatically turn a machine at the row end, reducing unproductive time a farmer spends aligning equipment for the next trip down the row.
  • Remote-control guidance systems that allow an operator to be out of the cab while the machine handles dangerous or monotonous tasks on its own.
  • Multi-vehicle controls that, for instance, allow a farmer to unload the contents of a moving combine into a driverless grain cart, then send it back to the storage silo using wireless line-of-sight controls.
  • Chemical sprayers that change the ratio of chemicals from row to row depending on what's needed.
Raj Khosla, assistant professor of precision farming at Colorado State University and a cooperative extension agronomist, is particularly enthusiastic about the yield monitors that Deere and Agco have made standard. The yield monitors combined with the GPS systems map the fields and indicate which portions are most productive. That way a farmer can increase fertilization and seeding on those areas that need it most and cut back where it's going to waste. They also can track precisely which grain or soy beans came from which part of the field, which is important not only for identifying positive crop characteristics, but also for isolating genetically manipulated yields. "It's a great invention that really helps farmers make good decisions," Khosla says. Estimates of savings combined with increased productivity go as high as 50%. But as Khosla points out, even if the farmer does nothing more than save $1 on each acre every time he seeds or fertilizes his 10,000-acre spread -- four trips through the field a year -- in a typical year he'd save $40,000, enough to pay off what the addition of basic GPS technology adds to the cost of a tractor. But computer technology isn't everything in the tractor business. Rosenquist, the 47-year-old Atwood, Minn., farmer says skeptically. "The problem with a lot of high-tech stuff is that farmers like me don't have the time to get everything mapped out and dialed in. When the weather is good to go, you can't be sitting at the end of the field trying to get the tractor programmed." He considered ease of operation and a good dealer network the deciding factors when he selected his fire-engine red CNH tractor. "That and I wanted the cab to be comfortable," he says. With the number of farm-implement dealers shrinking as quickly as the number of farms and farmers, Mike Duffy, agricultural economist at Iowa State's College of Agriculture, thinks good service is a big deal for many farmers. "With these new high-tech tractors and combines, you can't just mess around and hope you get it right. You have to have somebody who knows what he's doing." Even the kind of tires a farmer chooses for his tractor is more complex than it used to be and can make a difference, Duffy says, cutting down on soil compaction and ensuring that GPS guidance systems work properly. Good tires also can reduce the time a farmer spends getting from one field to the other. Michelin Ag makes radial tires that allow a tractor to go as fast as 55 mph on the highways a farmer takes to get his equipment from one field to another. As Duffy says, "it might sound simple, but it can be a big issue." What's Next? Driverless tractors. "It won't be long before a farmer will be able to sit under the shade tree and watch his tractor do all the work," predicts Emmett Barker, co-president of AEM, based in Chicago. Deere has made a priority of researching and building sensors that will solve the safety and machine function issues that currently are a barrier to autonomous operations. Meanwhile, Rosenquist just bought another farm, adding 750 acres to the 7,000 he, his 20-year-old son Jason, one full-time helper and a part-timer till. His wife Deborah keeps the books. "I'm not doom and gloom about this business," he says. "But I'm not just counting on the farm bill either. Anybody who just counts on farm bills isn't farming. They're out of business."
A Brighter Future Factors influencing future sales (2002 to 2004) of farm equipment based upon several years of surveying Association of Equipment Manufacturers members. The chart reflects how those responding believe the listed factors will influence sales. Factors are ranked based on level of positive influence: high (100%) to low(0%).
Factors 2002 2003 2004
Credit availability 92.1% 92.1% 81.6%
Interest rates 92.1% 71.1% 52.6%
Government payments 73.7% 89.5% 89.5%
Farm debt 63.2% 63.2% 63.2%
Net farm income 48.6% 75.7% 86.5%
Farm cash receipts 39.5% 57.9% 68.4%
Planted acreage 52.9% 61.8% 67.6%
Grain exports 42.9% 61.8% 76.5%
Wheat 45.5% 42.4% 53.1%
Corn 35.5% 41.9% 58.1%
Soybeans 25.8% 41.9% 64.5%
Cotton 7.4% 22.2% 40.7%
Replacement demand 61.1% 83.3% 85.7%
Farmers attitude toward buying equipment 48.6% 91.9% 91.9%
Prices of new equipment 37.8% 35.1% 45.9%

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