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Stock Strategist Industry Reports

Are North American Farm Equipment Sales in a Bubble?

After several strong years of U.S. and Canadian machinery purchases, growth rates look to slow.

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Farmers' spending habits tend to rely on the weather. A growing season that is too hot and arid--as seen in 2012--can wreak havoc on corn and soybean yields, ruining a farm's crop production, whereas favorable conditions can lead to a bumper harvest. Crop prices add a further wrinkle; extreme drought typically leads to sharply rising per-bushel prices, while oversupply can push down values substantially. Because farmers' cash receipts (a product of harvested tonnage and crop prices) tend to drive machinery purchases in any given year, it is therefore very difficult to estimate the industry's short-run performance.

We've previously opined that the medium-term outlook for crop prices is downward, leading to our forecast of slowing growth rates and lower profitability for farm equipment manufacturers such as  AGCO (AGCO),  CNH Global (CNH), and  Deere (DE). Now, we've become increasingly concerned that several other shorter-term factors may be boosting the annual sales rate of tractors and combines above their long-run potential. In particular, we think recently renewed tax credits, lofty used equipment prices, extremely low interest rates, and favorable crop insurance payments could negatively affect the new equipment market if reversed.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.