Baird Research analyst Robert McCarthy’s Nov. 12 analysis of the October retail sales numbers from AEM...

North American retail sales comparisons for row crop tractors and combines improved modestly in October, as stronger demand from Canada offset continued US weakness. In one of the most important months seasonally for large tractor sales, row crop sales declined 22%, while 4WD sales fell 6%. Combine sales were relatively stronger (up 6%) as the selling season winds down. Given challenging fundamentals, ag equipment demand appears likely to remain weak into 2010.

 * US and Canada row crop tractor sales fell 22% year/year in October, an improvement from September's 35% decline. Sales were down 31% year/year in the last three-month period.

* 4WD tractor sales fell 6% in October, down from a +3% comparison posted in September and benefiting from a more than doubling of Canadian 4WD tractor sales year/year (US sales declined 23%); trailing three-month sales were down 2% year/year.

 * October is an important month seasonally for row crop and 4WD tractor sales, contributing 12.9% and 15.7% of annual sales on average, respectively.

* US dealers' large tractor inventories remain elevated. Row crop and 4WD tractor unit inventories increased 53% and 30% year/year on an absolute basis, while days-sales of inventory increased 64% and 23% year/year, respectively.

 * Combine sales increased 6% year/year in October versus a 7% decline in September, as a 68% increase in Canadian combine sales offset a 7% decline in US sales. Combine sales increased 4% on a last three-month basis.

* October marks the end of the late-summer/early-fall combine selling season; October averaged approximately 11.2% of annual sales over the past five years.

* US dealer inventories of combines increased 4% year/year and declined 24% sequentially, returning to a normal seasonal pattern after unusually high inventory levels in August. On a days-sales basis, inventory declined 15% to 54 days-sales.

 * Compact and mid-range tractor sales weaken further, falling 25% and 35% year/year, respectively, after 21% and 25% declines in September.

* Deere will discuss its retail sales and inventory versus the industry when it reports 4Q09 results on November 25.

 * WASDE report incorporates higher soybean, lower corn production. The USDA increased its production and ending stock estimates for soybeans, while lowering its yield, production, and ending stock estimates for corn. The 2009/10 wheat price forecast was tightened by $0.10 on both ends to $4.65-5.05, while both the soybean and corn price forecasts were increased by $0.20 to $8.20-10.20 and $3.25-3.85, respectively.