Do You Want Good News or Bad News?
September 30, 2014
Last week I had a long telephone conversation with an equipment dealer I know pretty well. We discussed where the industry is these days and where it's heading. At one point he asked me, "Have people told you that you're a pessimist?" I said, "Yup." He said, "I've been told the same thing, but I just tell them that I'm a realist."
Of course, I've also been told that I'm "too optimistic" at times. Like late last year, an industry analyst said he thought our outlook for 2014 was way too positive. You know, sometimes you just can't win for losing, like right now, for example. Those dealing in cash crops don't have a particularly rosy outlook for the year ahead as they watch prices for corn, soybean and wheat looking for a bottom. On the other hand, those involved with livestock and dairy are having the time of their lives with meat and dairy prices hitting record highs.
You can read how North American dealers see their prospects for farm equipment sales in the October/November issue of Farm Equipment. But if you examine some of the longer term trends that are taking shape, you can determine for yourself if it's good news or bad news.
If you checked in our "On the Record" videocast September 19, (you can see it here) you'll recall we looked at a report from the independent investment research firm Morningstar on the impact that ethanol and biofuel production has had on ag equipment sales over the past decade. Their conclusion is that the "biofuel supercycle" is winding down.
In his analysis, Kwame Webb of Morningstar pointed out that the surge in farm machinery sales during the past decade was fueled by growing per capita calorie consumption, shrinking agricultural workforces and surging demand for biofuel crops. The first two factors will continue to have a positive influence on ag equipment sales in the long term. And while production of ethanol and biofuels will continue to be an important end-user for corn and soybeans - it's not going away - it will not produce the impact it has during the past several years. (On the other hand, there have been some very positive developments recently in the production of cellulosic ethanol.)
How much has ethanol production affected farm equipment sales?
According to Webb, during the past decade Deere and AGCO's share prices have appreciated 170% and 189%, respectively, compared to the S&P 500's 76% gain. Deere and AGCO have also grown their revenue at 10% and 12% compound annual growth rate, respectively, which has been much faster than the 6% annual global agricultural machinery market growth.
During the period, global crops have grown 3% and ag equipment grew 6%. "I think if you look at that multiplier for the U.S., ag equipment sales are probably only going to grow 1-2% and probably globally, ag equipment demand will grow 3-4% over the next decade. Albeit, 2014-2015 will be below trend," says Webb.
On the other hand, it's been well documented that the demand for protein (primarily meat products in Asia) is growing at an unprecedented rate. Will it be enough to make up for the flat demand for corn? I don't know, but I'll keep an eye on it.
So is all of this good news or bad news?
I think if you're planning for the future, it's good to know these things. If you're only planning for tomorrow or next week, I suppose it could be construed as less than positive. For those who have suggested that it would be better if we didn't report on these things at all (which we've heard more than a time or two), you'll have to wait until I retire.