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.
Welcome to the coronavirus conundrum. 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, unable to say how long it will last or how economically damaging it may be.
The result: Both Deere & Co. and AGCO Corp. pulled their financial outlooks on Monday, 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. Now, with coronavirus sapping its ability to forecast the future with any confidence, the company is changing its path.
“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,” Mircea Dobre, senior research analyst at Robert W. Baird & Co., said in a recent note.
Already, large-tractor sales are 50% below their peak, according to Bloomberg Intelligence. Normally, that would be a sign that 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 federally designated in the U.S. as an essential infrastructure businesses. Further updates will be provided in the Company’s second-quarter earnings announcement and conference call scheduled for May 22, 2020, the company said.
In February, Deere forecast an earnings range of $2.7 billion to $3.1 billion in a statement that made no mention of the coronavirus already erupting in China. That compared with an average estimate by analysts of $2.9 billion. The company reported adjusted earnings of $1.63 a share for the first quarter, up from $1.54 a year earlier.
In Europe, production has already been significantly reduced or suspended in several of AGCO facilities as the virus has raged across that continent, the company said in its statement. AGCO blamed that on shortages and constraints in the European supply chain. Additional production disruptions in other regions are expected, the statement said.
Since the virus erupted in China, Deere has had a special crisis team of 10 people meeting daily on its impact, although everyone involved in global supply management is ultimately involved. Deere has also booked premium space on charter flights to obtain crucial parts directly from China, the company told Bloomberg in an email.
In Brazil, a key market for global machinery makers, the coronavirus spread is leading to suspensions of agricultural fairs, worsening the outlook for sales. Rural fairs, events in the countryside where machinery makers can exhibit equipment, play an important role in machinery sales for companies. Last year, Agrishow, the biggest rural fair in the nation, totaled 3 billion reais in sales.
Weak farm fundamentals and lack of detail on the phase-one 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 a report by Bloomberg Intelligence. That will make adoption of high-tech and pricey precision agriculture methods and aftermarket services more important for profits.