Contraction Today, Consolidation Tomorrow?

North American farm equipment takes a downturn. Rabobank expects revenues to decline by -25% in 2015 and -10% in 2016 with little prospect for stabilisation until 2017 at the earliest. Although the industry has seen positive sales growth in the smaller end of the tractor market, the overall operating environment for original equipment manufacturers (OEMs) of farm equipment and machinery remains quite ominous.

At its core, demand for agricultural equipment and machinery is driven by grain demand, commodity prices and farmer income. After several years of rising row crop prices, a perfect storm of high crop production (in excess of demand), a sharp correction in grain values and contracting farmer margins in mid-2014 drove reduced purchases of large tractors and combines. Equipment is usually the first farm input purchase to be delayed or eliminated during a downturn, and so the precipitous decline in new equipment sales following the drop in corn and soybean prices was logical. 

The silver lining in Rabobank’s forecast is an opportunity for disciplined competitors to consider strategic mergers and acquisitions that will grow market share, diversify product offerings, enter adjacent markets and expand in higher-growth regions. With cheap debt funding available and lower implied valuations, the larger manufacturers with access to capital markets have a compelling opportunity to acquire smaller harvesting and implements manufacturers in order to drive revenue growth. 

Read the full details in the Rabobank report ‘Contraction Today, Consolidation Tomorrow? Looking beyond the Downturn in North America Farm Equipment’.