This year has so far been a positive one for the ‘big three’ manufacturers with John Deere, CNH and AGCO all reporting increased sales and profitability for the first half of 2023.
Naturally, their reports to shareholders hold out that these impressive results are set to continue, yet investors appear to be less certain with AGCO shares dipping 20c over the past month, down from 140 in mid-July to a shade under 120 today (Monday, August 21).
Save your tears
The pattern is repeated elsewhere with the shares of all three dropping back, yet concern for this development should be tempered by the fact that all three have enjoyed a boom over the past three years.
Looking back to January 2020 CNHi shares stood at $11, they are presently trading at $13.05 after achieving $18 in February, so the recent downward movement appears to be part of a trend rather than a sudden reaction to current conditions.
AGCO has also moved back from a peak in March of $144 and now stands at $119.46, yet that compares very favourably with the January 2020 figure of $62, so are still just under twice their value immediately before the disruption of Covid-19.
However, the best performance has been recorded by John Deere. Today the shares stand at $397.02, 2.3 times greater than January 2020.
This year the price enjoyed two distinct peaks, the first in January at $438 and the second in August at $446, so any recent fall must be seen in that context.
It should also be noted that in late May, they dropped to $346, so they are still healthy enough despite reports of a dramatic fall in the last few days.
Constrained optimism
Overall, the big three have little to complain about; their earnings are up, as are their share prices over the past couple of years, but each are being cautious in projecting this success into the future despite overall sales figures remaining consistent.
Sentiment in the market suggests that this is a wise move as dealers are reporting continued interest, but are uncertain how that will translate into sales; the increased cost of machinery and reduction in milk and grain prices will have shaken confidence to a great extent.
In the recent round of quarterly earnings calls, John Deere suggested that “we’ve seen material cost inflation come down meaningfully throughout the year. We expect this trend to continue throughout the rest of the year”.
Managing price reduction
The same will apply to all manufacturers so, in theory, we should see prices come down, even more so if dealer inventories are recovering and there will be stock that needs to be moved on.
Yet, once a company has put its prices up, it is very difficult to bring them down again, it is a somewhat different situation to the supply and demand curve of commodities.
One of the chief problems is that having sold a tractor for €100,000 to a farmer, the customer will be annoyed, to say the least, if the dealer later sells the same item to a neighbour for €95,000.
We will therefore not be seeing any obvious drop in retail prices; the listed figures are very likely to remain the same.
What will happen instead is that to secure sales in a flat market there will be some quiet discounts given, increased trade-in prices offered and cheaper finance, which is something we are already seeing.
Falling sales will bring bargains
Manufacturers are caught in something of a bind; they have been happily increasing prices in a market that has been capable of meeting them, but the world has changed, the Ukrainian situation has not produced the anticipated shortages in world grain supplies and global dairy prices are falling.
Their customer base does not have the income that was expected yet, as machinery producers, they do not want to cut prices, not publicly anyway.
Next year might be an opportune time for farmers to start flexing their buying power down at the local tractor franchises.
