Used farm equipment sales bad for Deere

Farmers pinching pennies as income takes a hit

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Bloomberg

Deep in the heart of the U.S. grain belt, farm equipment auctions are attracting bidders from as far away as South Africa as the agriculture rout makes used machinery more attractive.

As farmers move away from buying new tractors and combines, it could mean more pain for Deere & Co., the world’s largest agricultural equipment manufacturer, which is already struggling through an industrywide glut. To understand why, look no further than Matt Maring, owner of an eponymous Kenyon, Minn.-based auction operation.

Buyers are driving more than 400 miles to attend his auctions and online simulcasts are drawing participants from around the globe, boosting the bidding field, said Maring, who has been an auctioneer for 36 years. Farmers are spending $50,000 on replacement tractors that would otherwise cost more than $100,000 new from Deere, he said.

As a global grain glut is poised to reduce U.S. farmer incomes for a third straight year, growers are tightening their pocket books and increasingly turning to used machinery to trim spending. Adding to the picture, credit conditions have eroded and made it tougher to get a loan for new equipment.

For Moline, Ill.-based Deere, farmers turning away from its dealerships could further pressure profits and underscores why Moody’s Investors Service this week downgraded its outlook on the company’s credit rating to negative from stable.

“This is much worse than expected,” Eli Lustgarten, an analyst at Longbow Research in Independence, Ohio, said by phone. “The crops are so much bigger,” making farmers less willing to spend, he said.

Deere’s third-quarter adjusted profit is expected to drop 38 percent from a year earlier to 94 cents a share, the average of 19 estimates in a Bloomberg survey showed. The company is scheduled to report on Friday before the start of trading in New York.

While inventories of farm tractors have declined since reaching a 16-year high in April, stockpiles are still at record seasonal highs, according to the Association of Equipment Manufacturers. As farmers buy more used equipment, the glut is unlikely to be wiped out any time soon.

Machinery auctions are on the rise, said Greg Peterson, the founder of MachineryPete.com, a website that monitors prices of farm equipment at auctions. He’s seen a 20 percent jump in the past year for search traffic for low-horsepower machinery on his website.

At an auction last week in Hammond, Ill., it took about 17 minutes for a large tractor in excellent condition to sell, when it should take about three minutes in a healthy market, Peterson said. The longer auction time reflects the increased number of bidders and an aversion to escalating prices.

Peterson said even dealers are showing up at auctions to get good deals and resale at a profit. For Deere, it means a prolonged rough market to navigate, according to Karen Ubelhart, an analyst at Bloomberg Intelligence in New York.

“People are comfortable that it’s bad and that it will take a while” to recover, Ubelhart said. “It’s not great, but they’re not bleeding. It’s just not getting better.”

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