Tractors and combines should fly out of American dealerships as farmers desperately need to replace an aging fleet. They are not, and at the same time, production in Europe is hampered by shortages in the supply chain.
Welcome to the puzzle of the coronavirus. Harassed last year by the uncertainties of the trade war and low crop prices that kept farmers from accumulating cash, the world’s big machinery companies are now struggling to deal with the ambiguity surrounding a deadly pandemic, unable to say how long it will last or how economically damaging it can be.
The result: Both Deere & Co. and AGCO Corp. withdrew their financial perspectives on Monday, and both said they were downsizing. For Deere, the decision comes just a month after announcing an unexpected surge in earnings and maintaining its annual outlook on the first signs of stabilization in the US agricultural sector. Now, with the coronavirus depleting its ability to forecast the future with some confidence, the company is changing its path.
“The market has a significant downward price” for machinery companies, “but there has been no global pandemic for more than 100 years, so there are not many precedents to turn to,” Mircea Dobre, analyst at Research by Robert W. Baird & Co. said in a recent note.
According to Bloomberg Intelligence, sales of large tractors are already 50% below their peak. Normally, that would be a sign that a much-needed purchase should occur. Instead, as the United States begins shutting down to stop the spread of the virus, Deere said it is downsizing some operations and temporarily shutting down others, even though its industry has been federally designated in the United States as a essential infrastructure. More updates will be provided in the Company’s second-quarter earnings announcement and conference call scheduled for May 22, 2020, the company said.
In February, Deere forecast a profit range of $ 2.7 billion to $ 3.1 billion in a statement that did not mention the coronavirus that is already erupting in China. That compares to an average analyst estimate of $ 2.9 billion. The company reported adjusted earnings of $ 1.63 per share for the first quarter, up from $ 1.54 a year earlier.
In Europe, production has already been significantly reduced or suspended at several of AGCO’s facilities because the virus has exploded on that continent, the company said in its statement. AGCO attributed that to shortages and limitations in the European supply chain. Additional production disruptions are expected in other regions, according to the statement.
Since the virus broke out in China, Deere has had a special crisis team of 10 people who meet daily about its impact, although everyone involved in global supply management is ultimately involved. Deere also reserved premium space on charter flights to obtain crucial parts directly from China, the company told Bloomberg in an email.
In Brazil, a key market for global machinery manufacturers, the spread of the coronavirus is leading to the suspension of agricultural fairs, worsening sales prospects. Rural fairs, events in the field where machinery manufacturers can display equipment, play an important role in the sale of machinery for companies. Last year, Agrishow, the nation’s largest rural fair, totaled R $ 3 billion in sales.
Weak agricultural fundamentals and lack of details on the first phase trade agreement between the United States and China are bearish factors for 2020. However, in the long term, the aging of the fleet and the growth of the world population will be favorable, according to a Bloomberg Intelligence report. That will make adopting expensive, high-tech precision farming methods and after-sales services more important for profit.