Deere To Feel The Heat As Agriculture Equipment Sales To Remain Sluggish

John Deere (NYSE:DE) has experienced weakened financial performance in recent years.  The global farming equipment industry witnessed a steep decline in sales starting 2014 due to lower farm incomes globally.  Low commodity prices, the economic slowdown in China, the Brexit vote, and other uncertainties have resulted in low confidence among farmers, who as a result are deferring the replacement their existing machinery. Deere’s revenues declined as a result by nearly 21.3% in 2015 and continued to decline in the second half of 2016. We forecast Deere’s sales will decline in near term due to low commodity prices worldwide, low GDP growth of developing countries and economic slowdown of China. However, with expected recovery in crude oil prices and revival of Chinese economy next year, we estimate the global farming equipment industry will  grow from 2017.

How Big Is The Global Agriculture Equipment Market?

Global agriculture equipment industry was estimated to be about $140 billion in 2015 and grew at CAGR of 5.6% in the between 2011 and 2015. This includes sales of tractors, harvesters, balers, tillage equipment, sprayers and seeding equipment. The market grew at an average annual rate of 7.9% between 2009 to 2014 driven by higher demand for agricultural equipment due to improved farm incomes, which prompted farmers to replace their older machines.

However, commodity prices started declining following sharp fall in global crude oil prices in the second  half of 2014, resulting in lower equipment sales in 2015 and the first half of 2016. The economic slowdown of China has also played a big role as the country is one of the largest markets for the agricultural equipment.

Expect Recovery In 2018 And Beyond

Global agriculture equipment industry continued its decline in 2016. We expect this trend to continue for the next few quarters, due to weak farm income and low commodity prices. Crude oil prices are relatively stable but still significantly lower when compared to a year ago.. We don’t see much recovery in the agricultural equipment industry before 2018. Moreover, the average replacement cycle for farm equipment is about 9 years.  It is unlikely that equipment, that was bought after the 2008-09 recession will be replaced in the next year. Sales in North America and Europe are also expected to be low in 2016 due to weaker farm cash receipts and low growth in region’s GDP.

The long-term potential for the market remains intact, however,  due to the expected improvement in commodity prices and increased new equipment demand in order to fulfil the growing food requirement. We currently estimate the industry to recover its 2014 levels by 2022.

Agriculture and Turf Equipment Industry To Steer Deere’s Revenue Growth

Agricultural and turf equipment business accounted for about 70% of Deere’s (NYSE: Deere) overall revenues in 2015. Needless to say, the company has very high exposure to this market, with nearly 12% market share. In line with the industry trend, we expect Deere’s agriculture and turf equipment revenues to decline for next few quarters and rebound post 2017.

Going forward, we expect agriculture and turf equipment market to decline in the near term but rebound to its current levels by the end of 2021. However, early recovery of Chinese economy and rise in commodity prices due to OPEC countries decision on cap oil production could push the market above our estimates. If the figure reaches $155 billion instead and Deere is able to maintain its market share due to its recent joint ventures in precision planting in Europe,  our Price estimate for the company could see an upside of about 10%.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively.

For precise figures, please refer to our complete analysis for Deere & Company.

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