Declining Farmer Sentiment Will Impact Equipment Sales
July 18, 2012 — While the drought in the U.S. is bullish for crop prices, it’s taking its toll on farmer sentiment, which can be equally important when it comes to equipment buying decisions.
In a July 17 note, JP Morgan analyst Ann Duignan downgraded shares of Deere & Co. from “overweight” to “underweight” because of the “deteriorating fundamentals in the Midwest.”
With the drought now impacting more than 80% of the region, crop yield expectations are diminishing with 2012 drawing comparisons with 1983 and 1988 when corn yields came in 20-30% below trend.
“This year, a 20-30% below trend line yield would result in a yield of about 140 bushels per acre, coupled with lower harvested acres, could result in a 12 billion bushel corn crop vs. the 14 billion bushels initially forecast,” says Duignan. “All else being equal, this would mean an 800 million bushel deficit in corn, implying higher prices will prevail until sufficient demand is destroyed, that is ‘high prices fix high prices.’”
The analyst notes that overall farmer sentiment is deteriorating. “While mathematically cash receipts continue to rise on higher prices, farmer sentiment is driven by both prices and volumes,” Duignan says. “While it is hard to quantify ‘sentiment,’ we have spoken with a number of our farmer contacts in the Midwest and what is different this cycle is: 1. The drought is extraordinarily broad based (>80% impacted); and 2. farmers have been spending at an elevated level for 4-5 years, implying that they can hold off on spending for a season in order to rebuild confidence and cash.”