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John Deere farming equipment at a dealership in Petersburg, Ill. on Sunday, June 8, 2014. (SETH PERLMAN/THE ASSOCIATED PRESS)
John Deere farming equipment at a dealership in Petersburg, Ill. on Sunday, June 8, 2014. (SETH PERLMAN/THE ASSOCIATED PRESS)

Plunging grain prices hit Deere sales Add to ...

As farmers face plunging prices for wheat, corn and other grains, the companies that sell tractors, combines and other farm equipment are feeling the pain.

Deere & Co. on Wednesday said sales in the United States and Canada will fall by 10 per cent this year as farmers respond to falling grain prices by spending less money on the machinery they use to grow and harvest their crops.

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The Moline, Ill.-based maker of heavy equipment also said it will scale back production of tractors and other farm equipment in line with falling demand as it cut its full-year profit outlook.

Grain prices have plunged this year on expectations for a large global crop, which follows last year’s large harvest in North America. Wheat prices in Chicago have fallen by 13 per cent this year and are down by 44 per cent since the drought-fuelled peak reached in 2012. Prices for canola, Canada’s most valuable crop, are down by 9 per cent.

Agriculture equipment sales are driven by farmer confidence, which in turn is driven by crop prices, weather, the growing season and balance sheet strength, said an executive with Canada’s largest independent dealer of farm equipment.

But the decline in commodity prices is the “number one driver” for the drop in agriculture equipment sales this year, said David Ascott, chief financial officer of Rocky Mountain Equipment, which sells Case and New Holland farm and construction machinery at 38 dealerships in Alberta, Saskatchewan and Manitoba.

“We have seen an impact in the first six months of the year and we will continue to see it throughout the end of 2014,” said Mr. Ascott, who pegs the 2014 sales decline for the industry at 5 to 15 per cent.

Rocky Mountain, which derives 90 per cent of its sales from agriculture, has seen an 11-per-cent rise in service and parts sales this year as farmers delay the purchase of new tractors and instead keep the old ones in the field, Mr. Ascott said.

Peter Prattas, an equity analyst with Cantor Fitzgerald in Toronto, said the lower commodity prices will give farmers smaller budgets to replace and upgrade their machinery. “But at the end of the day, farmers still need their equipment, and despite the fact there’s going to be lower prices, there is going to be an uptick in [crop] volumes” as yields and planted acreage rise, Mr. Prattas said in an interview.

Mr. Prattas is forecasting “low single-digit” declines in 2014 sales for three publicly traded farm equipment dealers, Calgary’s Cervus Equipment Corp., Rocky Mountain Dealerships and Titan Machinery Inc., which operates in the U.S. Midwest.

“We do expect some negative impact on the overall amount of money they put toward farm equipment, but it’s not going to be commensurate with the decline in farm income,” Mr. Prattas said.

The U.S. Department of Agriculture has forecast 2014 farm incomes will fall by 27 per cent this year to $95,000 (U.S.), the lowest since 2010. In Canada, similar numbers are not available. Based on data available in December, the federal agriculture ministry said 2014 farm incomes will “drop modestly” as low crop prices persist. The average net operating income on Canadian farms in 2013 is expected to be a record $68,000 (Canadian), according to Agriculture and Agri-Food Canada.

The lower grain prices are hard on growers of wheat, corn and soy, but welcome news for livestock producers, who buy the commodities for feed. For this reason, Deere said its sales slump will be most felt in large field tractors and combines, while sales of small- and medium-sized tractors should fare better.

The company, whose share price fell by 2 per cent on Wednesday, said in a statement increasing global demand for food and infrastructure and construction hold promise for future growth.

In response to the lower grain prices, some farmers are expected to store their crop and wait for markets to improve. At the same time, they will be harvesting more crops per acre, as a result of improved growing techniques and good weather.

So while dealers are facing leaner times, Mr. Prattas sees an upside for Ag Growth International, a Winnipeg-based maker of grain handling machinery and storage bins that has factories in Canada, the United States and Europe.

Follow on Twitter: @ericatkins2

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