Tractor sales stall on trade woes in the Farm Belt

Sales of tractors and combines to farmers hurt by tariffs on U.S. crops and meat are slowing, jeopardizing a nascent recovery for agricultural-machinery makers.

While other machinery manufacturers have generated strong sales recently thanks to the robust U.S. economy, agricultural-equipment makers, including Deere & Co. and CNH Industrial NV, were slower to benefit from that strength because farmers' incomes have been hurt by four years of low crop prices.

Farm-equipment sales began to climb earlier this year, raising hopes that some farmers were replacing older machinery, regardless of crop prices. Now dealers and executives are less optimistic.

Deere last month said its world-wide farm-equipment sales would rise just 3% this fiscal year, down from 15% growth in the year that ended in October. Deere doesn't disclose actual sales for the U.S. and Canada, but industry analysts anticipate sales growth in the region next year will be on par with the company's overall forecast.

"There is no doubt trade concerns have had an impact on farmer sentiment over the last several months," John Lagemann, Deere's vice president for agricultural sales, said during a call with analysts.

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In one sign of potential relief, the Trump administration on Saturday said it would initiate 90 days of talks with Chinese officials aimed at reducing trade tensions and duties between the two countries. The administration also said China agreed to purchase a "very substantial" amount of agricultural, energy, industrial and other U.S. products. In return, the administration said it will postpone plans to increase tariffs on $200 billion of Chinese goods exported to the U.S.

The U.S. Department of Agriculture estimates that U.S. sales of pork, soybeans and other foodstuffs to China will fall by nearly 40% next year to $12 billion if Chinese buyers follows through with plans to shift their purchases to other countries.

That will likely extend a decline in U.S. farm income. The USDA expects net farm income to fall 13% this year from 2017 to $65.7 billion, nearly half the all-time high reached five years ago.

Industrywide U.S. sales of the large tractor models used most often in grain farming slipped 8% in October from the same month last year, according to the Association of Equipment Manufacturers. Sales of combines fell 7%.

"Business is terrible," said Johnny Faulkner, manager of Heritage Agriculture of Arkansas, near Pine Bluff, Ark., a dealer for CNH's Case IH equipment.

CNH hasn't made a sales outlook yet for 2019. The company reported a 3.5% increase in farm-equipment sales in the third quarter that the company attributed in part to higher prices meant to offset increased costs for steel stemming from the U.S. tariffs on metal imports.

Mr. Faulkner, whose sales territory has been beset by rain that has destroyed some crops and left others unharvested, predicted those price increases are putting new models out of reach for farmers earning less money.

"Farmers have gotten hit so hard," Mr. Faulkner said. "It's made it tough for us all."

Both Deere and CNH are betting that farmers will continue to replace older models with new machinery with lower operating costs and technology to plant and fertilize crops more precisely to increase yields.

CNH Chief Executive Hubertus Mühlhäuser echoed predictions that farmers will plant more corn next year as a result of China's tariffs on U.S. soybeans, which he said will drive demand for new machinery. Corn needs fertilizer and the yields per acre are larger than soybeans, requiring farmers to run their equipment longer and more intensely.

"Demand will hold for our tractors," Mr. Mühlhäuser told analysts last month.

Some farmers, though, say they aren't willing to take on the added expense of new equipment.

Kevin Criswell, a farmer near Marion, Ohio, said he wants to purchase at least two combines before next year's harvest. He said he is looking at used models that are significantly cheaper than the $800,000 that a new combine would cost.

"There's an abundance of used equipment. Dealer lots in our area are full," the 62-year-old farmer said.

Some analysts say the Trump administration's aid payments to farmers could help equipment makers. The USDA this fall began distributing payments to farmers for lost business caused by trade disputes. The USDA has projected making payments of some $5 billion, mostly to soybean growers.

Scott Irwin, a University of Illinois farm economist, said he is advising farmers to spend the cash on operating expenses rather than buying equipment on a bet that the trade disputes will be resolved before next year's harvest.

"I hear a good bit of wishful thinking on the trade situation with China, " he said. "It's a tremendous wild card."