The WSJ’s 2015 Ag Update

From the Wall Street Journal, January 6, 2015:

Bumper crops have pushed down prices, ushering in a new austerity for farm-equipment purchases. Midwest prosperity through 2013 produced a long rally for machinery sales.
Bumper crops have pushed down prices, ushering in a new austerity for farm-equipment purchases. Midwest prosperity through 2013 produced a long rally for machinery sales. BLOOMBERG NEWS
Farm Economy Faces Further Austerity

Many U.S. farmers are expected to tighten their belts further in 2015 as they contend with another year of lower grain and soybean prices—economizing that could pinch the companies that sell them equipment and supplies.

Fall 2014 brought the U.S.’s second straight bumper harvest of major crops. While prices have rebounded in recent months from their lows, they are still projected to remain depressed through this year, with futures prices for corn staying below $4 a bushel, and soybean prices drifting lower to $9 a bushel, according to agricultural lender Rabobank.

Austerity in the farm economy comes on the heels of a commodity-price boom that helped fuel prosperity across the U.S. Midwest through 2013, driving farm incomes and land values to record highs—and fueling the North America farm-machinery market’s biggest and longest rally in memory.

“There are a lot of adjustments to come in the entire agricultural sector,” said Chris Hurt, professor of agricultural economics at Purdue University in Indiana.

He said farmers likely will curb spending on farm equipment, making do with tractors and combines they already own and squeezing profits for manufacturers such as Deere & Co. Demand for farm supplies like fertilizer and seeds also could slow, which would hurt companies like Monsanto Co.

Deere, the world’s largest seller of farm equipment, has implied that North American unit sales of high-horsepower tractors—a market it dominates—could be down 40% in 2015 from last year, when industrywide sales sank about 15%. Deere and some analysts reckon that should be enough of a break from buying for farmers to return to the market in 2016.

“I don’t see 2016 being worse than 2015,” said Morningstar Inc. analyst Kwame Webb, who expects crop prices to firm in 2015, helping to raise farmers’ incomes.

Others aren’t convinced that an upturn is on the horizon. Rob Wertheimer, an analyst for Vertical Research Partners, notes that even if sales of big tractors fall 40% in 2015, the number of tractors sold would still be 38% higher than the volume in the market’s last trough in 2002. He said sales likely need to fall further to resemble earlier market slumps.

—Jesse Newman and Bob Tita