Ann Duignan, machinery analyst for JP Morgan, spent much of the first week of September at and around the Farm Progress Show in Decatur, Ill. Here's her take on what's happening in farming in the Midwest.
"We hosted a dinner with farmers and industry experts in Bloomington Ill. Additionally, we toured exhibits of AGCO, Case IH, John Deere and New Holland (as well as other ag-related companies) at the Farm Progress Show in Decatur, Ill. Overall, we came away feeling more bearish about the farmer sentiment and equipment sales into 2010. Here are our key takeaways:
• "The biggest concern facing crop farmers this season is the potential lack of crop quality this year. Normally corn ear weights run about 56 lbs. per bushel, but because of cooler-than-normal temperatures resulting in fewer "growing degree days," ear weights for the farmers we spoke with are expected to be somewhere around 48-50 lbs per bushel. This could result in lower prices for farmers—in the form of discounts which will not necessarily show up as lower futures prices. Farmers cannot insure against poor quality, only poor quantity, and, as a result, sentiment has deteriorated, in our view.
• "Poor quality corn could have a negative impact on many sectors, including the ethanol industry, which depends on high starch content, and the protein sector, which depends on corn for feed. Farmers noted that this year feels a bit like 2004 when the "quantity was good but the quality was not--so the value of the crop disappointed." If feed quality is lower than expected, this will simply put even more pressure on the already decimated livestock sector.
• "The farmers we hosted noted that they will likely cut back on insecticide and fungicide first, then fertilizer if necessary. They are taking "a wait and see" approach to purchasing fertilizer, at least until they see what the harvest looks like.
• "From an equipment standpoint, most of the focus was on Tier 4 interim emissions standards which take effect in 2011. Much like the on-highway situation, OEMs have chosen different paths — DE will use an EGR engine for 2011 and has not decided which technology path it will pursue for final Tier 4 (in 2014). CNH and AGCO are both using European engine technologies and will use SCR solutions in 2011. Both AGCO and CNH expect better fuel efficiency from SCR engines (CNH mentioned 20% improvement vs. current engines). If correct, DE could face market share erosion between 2011 and 2014.
• "Near term, the comparables are tough. U.S. equipment shipments peaked in September 2008 at a seasonally adjusted rate of $3B (up 10% MoM and up 45% YoY). Shipments are currently running at a SA monthly rate of $2.3B (down 22% from peak) and are expected to decline significantly from here. In fact, Case IH expects sales of large HP equipment to be down 10-15% in 2010.