The following article is based on Ann Duignan's presentation at the 2017 Dealership Minds Summit. To watch the presentation, click here.
Ann Duignan, U.S. machinery analyst at J.P. Morgan, presents a unique view of the farm equipment business from a perspective not involved at all in iron sales. Duignan advises institutional investors on where to place pension fund dollars, so she closely follows the publicly held agribusinesses and the fundamentals for farm machinery. Her data-fueled presentation at the Summit covered the gamut of variables impacting farm machinery — from world stocks to leasing to Section 179 to ethanol and raw material trends that will result in OEMs raising their machinery prices.
Of primary importance were her analysis on stocks to use data and what is keeping commodity prices low for American producers. While she isn’t as negative as she was last year at this time, she admitted that “I certainly don’t see much to be cheery about.”
This year, 2017, was the first that many U.S. farmers were “on the edge of the cliff,” she says. “If they get average yields or below average yields and futures prices stay where they are, 2018 could be a very tough year.” She shared a P&L statement for an Iowa corn producer that demonstrated that breakeven was $4.50/bushel, or closer to $5 on rented ground.
Her data showed the U.S. has essentially given up its corn exports to Brazil and Argentina, whose corn exports surpassed the U.S.’s the last 2 years. This trend and the increase reliance on domestic demand, is her top concern for the U.S. agricultural industry.
“The world buyers have an alternative — they don’t have to rush and buy the U.S. crop; they can wait and buy the South American crop. If that alternative continues to be encouraged, they’ll grow more crops and that’s going to keep pressure on the U.S. This is the biggest reason why corn futures are not reacting to lower than expected yields in the U.S.”
She also presented a myth-busting chart that revealed China’s falling consumption of meat, an analysis the OEMs never talk about with investors amidst talk of rising protein consumption and middle class progress. Showing that meat consumption in China peaked in 2014, she added that the government is now aiming for less meat consumption as part of a healthcare initiative. “You better hope that China does not revert back to vegetables … there goes your demand story.”
