Deere & Co., CNH Industrial NV and other makers of the tractors and combines used to plant and harvest American crops are already facing weak demand from farmers as a result of a five-year slump in the agricultural economy.
That downturn is worsening this year as China buys less soybeans and other crops from the U.S., and manufacturers pay more for the steel and other materials they import to build their machines.
“People just aren’t buying. They’re afraid,” said David Savoie, vice president for Sunshine Quality Solutions, a Deere dealer in Louisiana where sales of big machinery have dropped significantly since last year.
During the first three months of 2019, U.S. agricultural exports to China were 40% below the same period last year, according to Agriculture Department data. And that comes on top of a steep decline in 2018, when the U.S. sold $9.2 billion worth of farm goods to China, versus $19.5 billion in 2017, the department estimates.
Deere said May 17 that it will cut production in the second half of its fiscal year by 20% compared with the same time last year. The Moline, Ill.-based company expects to record up to $75 million in higher costs this year for steel and metal components driven up by U.S. tariffs.
CNH, the U.K.-based manufacturer of Case IH and New Holland equipment, expects to pay tariff-related costs of between $50 million and $100 million this year. CNH manufactures farm equipment in the U.S. and is the second-largest seller of machinery in the domestic market behind Deere.
CNH and Duluth, Ga.-based AGCO Corp., whose machinery brands include Massey Ferguson and Challenger, reported lower farm-equipment sales in the first quarter from a year earlier.
U.S. farmers are holding machinery longer while their incomes are depressed. Sales of large, high-horsepower tractors in the U.S. and Canada are down 50% from 2013, even though sales grew last year, according to trade group data.
Farmers interested in buying new machinery are finding it tougher to trade in their older models because dealers are already stuck with inventories of used equipment that can’t sell. “That used market is fairly saturated now,” said Barry Alexander, manager of 13,000-acre Cundiff Farms in western Kentucky.
A long-running trend toward consolidation in the Farm Belt also leaves fewer customers for equipment dealers. And the larger tractors bought in recent years have given farmers more horsepower and greater efficiency, allowing them to buy fewer machines and replace them less often.
Deere’s production cut is rippling through its supply chain, where profits are already shrinking from weather-related delays in planting this year’s crop and lower grain exports. “Farmers are the collateral damage of that ongoing China-U.S. trade dispute,” George Reitz, the chief executive of Quincy, Ill.-based off-road tire maker Titan International Inc., told analysts earlier this month.
Titan on May 6 reported a 35% reduction in first-quarter profit from its farm business. At the same time, U.S. tariffs on metal and components from China are hurting other farm-focused manufacturers.
Pella, Iowa-based Vermeer Corp., which makes hay balers, said it expects to pay $4 million in direct tariff costs this year. Its steel costs rose 50% last year, but prices have been declining in recent months as steel inventories rise. Lindsay Corp. , based in Omaha, Neb., said profit from its irrigation business fell by 31%, as sales dropped 16% in the three months through February.
The Trump administration has said it would spend $16 billion to offset the impact on American agriculture from the trade dispute between the U.S. and China. Yet even if the dispute is resolved, some manufacturing executives say U.S. farmers might still be worse off than before if China continues to buy some grain from farmers in South America, which has increased output to accommodate the demand from China.
“Once those supply chains move, it’s not guaranteed they’ll come back,” CNH Chief Executive Hubertus Mühlhäuser said. “Brazil will keep its customers. They’ll put more acres under the plow.”