In looking ahead to the anticipated performance of the ag equipment industry, Ann Duignan sees several positives. In an April 16 note to investors Duignan, machinery analyst for JP Morgan, says she seen “a number of interesting developments in agriculture over the past few months.”
Among these are:
1. South America is about to deliver record crops, and Brazil could potentially be competing with the U.S. for corn exports just as China is starting to import corn;
2. Protein prices are recovering as supply-side dynamics are tightening;
3. The U.S. ethanol industry is facing renewed regulatory challenges. Brazil eliminated its 20% tariff on imported ethanol through 2011; however, it is asking the U.S. to eliminate its import tariff.
“Overall, the agricultural equipment industry is performing better than expected in the U.S. and Brazil. Accordingly, we have refined our models for AGCO, CNH and Deere to reflect the industry data, and we are upgrading AGCO from Underweight to Neutral,” Duignan says.
She also added the following analysis of the overall state of agriculture in the U.S.
“Fundamentals in U.S. agriculture are OK at best, in our view, with some deterioration in farmer profitability over the past few months on the back of rising ending inventories and a stronger dollar. Current global stocks-to-use are trending the wrong way in beans and wheat, and the U.S. corn industry is now competing with foreign wheat as the dollar strengthens. That being said, farmer profitability still looks good with variable margins before rent ~35-47%.”
“The U.S. ethanol industry produced a record 818,000 barrels per day (bpd) in January, up 4% sequentially and up 30% year-over-year. Demand grew to 784,000 bpd in January, up 22% year-over-year. Producers are making ~4% variable profit, and blenders are enjoying profits of ~$1.10/gallon blended (JPMe). The biggest issues facing the industry are regulatory at this point, with inventories rising as many blenders have hit the blending wall.
“Brazil has completed about 65% of its bean harvest, and while estimates have been revised down a little, the season promises to be a record. Additionally, corn yields are expected to be up 45% year-over-year. This was a primary driver of the strength in Brazil ag equipment sales in recent months. While the seasonal peak in crop harvesting is past, we expect volumes to remain strong, as the sugarcane harvest season picks up about now.
“Using our proprietary revenue models, we estimate ag equipment sales are up ~8% year to date in North America and ~57% in Brazil. On the back of these better-than-expected numbers, we are raising our estimates for all three suppliers (Deere, CNH and AGCO) and raising our rating on AGCO from Underweight to Neutral (despite the FX headwinds the company faces).”