Machine Industry Consolidation

Every time there is a downturn, we hear rumors of consolidation, both of farms and the industries that serve them. This cool spell is no different. Rabobank analysts are the latest to speculate about consolidation in the farm machinery industry.

If they are correct in a recent report, the colors of your favorite farm equipment could soon change. "Contraction Today, Consolidation Tomorrow?" suggests we are about to see manufacturers merge, buy smaller companies and/or expand their offerings to include product lines not usually found on your local tractor dealer's lot.

"Consolidation in any sector or industry is a logical, natural response to difficult operating conditions or declining growth," said Rabobank's report. The "difficult operation conditions" to which the report refers are a witch's brew of factors. High commodity prices and favorable tax incentives sent farmers on a capital expenditure shopping spree; they stocked up with the latest in farm equipment and technology.

Then the commodity markets headed south. With less money to spend and farm machine sheds already full of shiny new equipment, farmers have been visiting dealers less frequently. Used equipment has piled up in those dealerships because second-tier buyers, who usually buy trade-ins, had bought new instead with money from high priced commodities. And third-tier buyers, who usually buy smaller older equipment, don't need the production volume of the large equipment.

In addition to all of this, the North American farm sector is considered "mature." That is, not many new players are entering the market these days.

A mess has ensued for dealers and manufacturers.

Writers of the Rabobank report (Rabobank is a Netherlands-based cooperative bank specializing in agriculture with a strong North American presence.) conclude that the downturn in equipment sales is both severe and persistent and that it will lead to a reshaping of the industry.

It suggests three scenarios: 1) Mergers among the largest manufacturers; 2) Acquisitions by the larger fish of smaller fish; 3) Manufacturers branching out into new product lines including grain storage and animal protein production systems.

It seems AGCO, one of the largest manufacturers to which the report refers, already got a jump on the acquisitions and new product line parts of this. The Georgia-based giant bought grain storage system manufacturer GSI in 2011. Of course, AGCO is a company built on acquisitions, so no real surprise there. This time around, AGCO has even launched its own line of UAVs (drones) as a way to capture more farmer dollars.

Of the three scenarios, Rabobank said acquisitions will most likely happen quickly. This is no great revelation considering all the major manufacturers routinely buy either shortline manufacturers or the rights to products that complement machinery portfolios.

The report classifies the six largest global players based on ag equipment revenues as, in order of size: Deere, CNH Industrial, AGCO, Kubota, Claas and Mahindra & Mahindra.

While short on specific predictions, the report does single out John Deere as unlikely to participate in any mergers. As the most dominant of farm equipment manufacturers in North America, Big Green would have little to gain from a merger. On the other hand, the report said, "A combination of any of these non-Deere tier 1 OEMS [CNH, AGCO] would create a more formidable competitor, with great scale economies and global reach."

If a shakeup is to occur, Rabobank said, it has at least a two-year time frame before machinery market conditions improve significantly: "Rabobank expects that, in North America, revenues derived from sales of tractors and combines will likely fall 25% in 2015, 10% in 2016 and 2.5% in 2017."

Whether those declines will be enough to trigger a major reconfiguration of the iron industry is a question with no easy answer. My guess: No.

The Big Four (Big Three if you count Case IH and New Holland as one within CNH Industrial) will likely remain. Deere is untouchable; CNH has strength in its commercial and construction sectors and has never shown a desire to separate Case IH and New Holland; and AGCO isn't big enough to swallow any of its competitors now.

(BAS)

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