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Agricultural angst is percolating through the food chain. Big suppliers of farming equipment, most recently John Deere of the US, are laying off staff. The agricultural machinery manufacturer is following in the furrow of peers AGCO and CNH Industrial. Shares in the trio have suffered, down 10-20 per cent year to date.
This is not a blip. Agricultural kit, like chips and ships, is a cyclical business, tracking sentiment and crops alike. Sales boomed in the post-Covid area, yielding rich returns for farmers and investors. Russia’s invasion of Ukraine, denting exports of oil, wheat and fertiliser, fuelled soft commodities prices. Cashed-up farmers were happy to splurge on new kit (reducing tax bills in the process).
Falling prices for corn, soyabeans and wheat change that. Higher interest rates weigh on big-ticket purchases. CEMA, the European agricultural machinery association, estimates volume sales of machinery will drop by as much as a tenth this year.
If anything, John Deere has left it late to cut costs and more lay-offs may follow across the industry. Production could fall further, with capacity idled. On the plus side, build ups in inventory, for which responsibility is shared with dealers, are not yet at levels that justify hefty discounting, industry experts say.
Like everyone from makers of ovens to cars, agricultural machinery makers are digitising, in an attempt to soften these cyclical downturns.
Smart tractors, sometimes called precision agriculture, offer farmers more bang for their acreage. Input your data — say, field boundaries and soil density — and the seeding machine will work out the distance between plantings and ensure every inch is covered. This informed CNH’s $2.1bn purchase of Raven in 2021. Start-ups have been snapped up for their autonomous and precision technology.
Diversifying income away from cyclical equipment sales is challenging. Unlike in aerospace, the role of aftercare often falls to the dealerships. Netflix-style subscriptions for farm management apps are proving a tough sell, not least due to connectivity issues in rural outposts.
Monsanto was forced to delay its profitability goals for The Climate Corporation — the data science platform it paid $930mn for in 2013 — to 2020, by which time the seed company itself had been bought by Germany’s Bayer.
These businesses may help around the edges. But they can’t stop the enduring drag from soft commodity prices. New machinery, while nice, is not a must-have. Kit generally has a five- to 10-year lifespan, but 20- or 30-year-old tractors are still trundling around. This cycle’s turning point has a way to go.