Cautious optimism.

That's the outlook of farm equipment makers as they head into 2003.

Opinions of the different manufacturers vary slightly, but they're all talking about leaving behind a recessionary cycle of low equipment demand that began in 1998. And they hope to climb out during the second half of this year.

Most industry gurus expected greater market improvement in 2002, on the heels of modest growth in 2001. “We saw recovery in the tractor business until this past year when we slid backwards by 10 to 15%,” says Robert Ratliff, chairman, president and CEO of AGCO.

“This slide was a surprise because many economic factors supported a slight improvement over 2001,” he says. “The drought didn't help certain farmers as it further deferred purchases, but we now believe the cycle has run its course and see positive signs of growth in 2003 through 2005 or so.”

Doug DeVries, Deere's senior vice president of agricultural marketing worldwide, also expects improvement in 2003. “The industry will continue a transition toward market growth as the fundamentals are in place. Yes, there are some concerns such as lingering drought, customer unfamiliarity with farm bill specifics, and commodity prices, but we're confident that overall sales will improve,” he says.

Second-half climb

Case IH Vice President Jim Irwin predicts greater stability this year, “but we feel the majority of growth won't occur until the second half of 2003. There's still some market hesitancy due to commodity prices, moisture shortage, and farm bill specifics, but we're on the downward end of the cycle and should see recovery later this year,” he adds.

The other half of CNH Global, New Holland, agrees with the overall industry outlook. “The Ag Equipment Manufacturers outlook predicts a 5% increase in overall sales for 2003, and we feel this will be fairly accurate,” says Allen Rider, vice president of the company's North American ag business.

Short-line equipment companies also see reasons for optimism. General Manager Vince Tomlonovic of Minnesota-based Hiniker Company is already seeing increased dealer and farmer inquiries on spring products. “We feel that there will be two distinct areas of sales activity, divided down the line of drought versus non-drought areas,” he says. “Where farmers had good yields, we'll see good sales activity, because there is pent-up demand to upgrade. But when you add the two areas together, it's hard to predict how much overall increase we'll see.”

Dick Brown, president of Kansas-based Krause Manufacturing, thinks agriculture's recovery will precede a recovery in the general economy. “Once the farmers are on the upturn, which we feel they are, then it usually takes our business a crop season to catch up, so we look for improved sales in the third and fourth quarter of 2003,” he says.

From its Ohio base, Unverferth Manufacturing is beginning to see some excellent Midwest activity on spring tillage tools, according to Dan Fanger, vice president of sales and marketing. “We're not anticipating a boom year by any means, just hoping to achieve a modest improvement over 2002,” he says.

Major mergers done

Like many industries, the machinery business has seen its share of consolidation. The big Case IH/New Holland marriage back in 1999 may have been the last of the big deals, according to most industry prognosticators. Yes, there are some that think Fiat's latest economic troubles cast a cloud over CNH's future, but some experts believe otherwise (see sidebar about CNH Global).

No major industry consolidation appears to be on the horizon. “There is no room for this,” reports John McGinty, long-time machinery industry analyst for Credit Suisse First Boston. “I don't think CNH or Deere could buy AGCO from a Justice Department standpoint.

“What we will continue to see are pieces of larger conglomerates being bought and sold, such as Europe's Partek tractors, Renault tractors, perhaps Same tractors and others,” McGinty says. “We'll also continue to see movement with short-line equipment companies as well.”

2003 ag equipment retail sales forecast
(unit sales — 2003 vs. 2002)
2-wd tractors
<40 hp +1.8%
40 to 100 hp +1.1%
>100 hp +2.5%
4-wd tractors +10.7%
Combines +4.8%
Field equipment +4.6%
Farmstead equipment +5.1%
Planters +4.9%
Air seeders/drills +9.0%
Field cultivators +1.3%
Disk harrows +2.2%
Source: Association of Equipment Manufacturers
“State of Ag Industry — Mid-year Outlook,” July 2002

And speaking of short-line companies, when one thinks of mergers and acquisitions, the name AGCO comes to mind. “This has been our core competency, and we've been very successful blending our many brands into an efficient company,” Ratliff says. “Along with our most recent additions of the Cat Challenger line and Sunflower tillage line, we anticipate further acquisitions over the next few years, adding companies that fit our strategy of adding new technology or market dominance.”

Shrinking chain

Equipment manufacturers realize the supply chain will continue to shrink. “Over the next several years, we'll see a continued reduction in owner groups of dealerships, but a fairly limited reduction in the number of outlets,” Deere's DeVries says.

As brand and product loyalties diminish over the years, equipment companies recognize the growing importance of their dealer organizations. Customers tend to be loyal to local dealers, but dealers face profit challenges due to this current down cycle.

The major equipment companies tout programs to help dealers become stronger locally. They are increasing dealer training, but also demanding that certain standards be met to achieve optimum customer satisfaction. “With fewer dealers out there, farmers have fewer choices within driving distance, so it is critical for us to do everything we can to help dealers improve customer loyalty,” says New Holland's Rider.

One sales trend that is helping the dealer is what companies call pre-selling. “We're offering more programs to pre-sell equipment,” Rider says. “Not only does this help the dealer reduce inventory costs, it helps us better learn customer needs and then build to suit those needs, reducing the costs for all involved.”

Irwin says Case IH already pre-sells a high percentage of its production, “but we're looking to increase these programs to shorten up the supply chain and get the latest technology to customers faster. Dealers are becoming advisors to producers, helping them plan purchases and placing orders a year or more down the road,” he says. “And this has become a big trend for us.”

Similar products

As the industry has consolidated, so has the manufacturing part of this sector. To be more efficient, and therefore more competitive, both CNH and AGCO have adopted common platforms across their tractor and combine brands, with increasing product line commonality slated for the future.

“In our new Racine, WI, plant, we have both red and blue tractors coming off the same assembly line, with 65% of the components being common,” Irwin says. “We'll soon be doing the same with combines as we merge manufacturing into the New Holland, Grand Island, NE, combine plant. And there will be more of this in the years ahead.”

AGCO, due to its 20-plus acquisitions and multiple-brand strategy, has been using common platforms across brands for some time. “Our tractors, excluding Fendt and Challenger, now have 65 to 70% parts commonality,” Ratliff says. “In combines, we're at about 50% commonality but plan to increase this rapidly, and in hay tools we run about 85% common parts.”

Future growth

Globally, most companies and analysts see continued growth in parts of Europe and South America. McGinty sees Europe as a market where unit sales will be flat to down but thinks there will be an increase in average horsepower. Latin American sales, he predicts, will remain relatively flat as well.

Looking past the next three to five years, McGinty believes Eastern Europe, China, India and the former Soviet Union offer huge market potential, but he says it's a difficult market to predict at this time, filled with more questions than answers.

AGCO

Despite a soft North American market, AGCO continues to do well because 75% of its sales are outside the U.S. “We've doubled our earnings in each of the last three years, showed significant gains in 2002 and will continue this in 2003,” says Robert Ratliff, chairman, president and CEO of AGCO.

According to the company's third quarter 2002 report, net sales for the first nine months of 2002 increased 18%, mainly due to higher sales in Europe and South America, plus incremental sales resulting from the Ag-Chem acquisition (April 2001) and the Challenger product line introduction. “Our growth in South America, where we're the market share leader, and in western Europe, where we're number two, continues strong,” Ratliff says.

AGCO's net sales are expected to grow approximately 13 to 14% in 2002 compared with 2001 sales, primarily due to the impact of the Challenger product line introduction, a full year of Ag-Chem sales and the strengthening of the Euro.

AGCO's big news in 2002 was its acquisition of the MT series Challenger tractor line from Caterpillar, plus the most recent addition of Sunflower tillage, seeding and specialty harvesting tools.

AGCO has signed up almost all of the 63 North American Caterpillar distributors and expects to sign up 45 distributors outside the U.S.

Ratliff is quick to point out that, despite an overall industry sales decline of 15% in 2002, AGCO increased market share on almost all products. “To name a few, the Massey Ferguson and Hesston lines are doing extremely well; we've added 150 or so new dealers in the past two years; our Fendt line of the world's most high-tech tractor continues to prove its value to customers; and our drive to give customers the latest technology continues on target,” he says.

AGCO products are distributed under the brand names AGCO, Ag-Chem, Challenger, Farmhand, Fendt, Fieldstar, Gleaner, Glencoe, Hesston, LOR*AL, Massey Ferguson, New Idea, Soilteq, Spra-Coupe, Sunflower, Tye, White Planters and Willmar. For more information, visit your local dealer or www.agcocorp.com.

John Deere

Compared with 2001 sales, Deere's agricultural division net sales were 12% higher for the fourth quarter and 7% higher for the year. The quarterly increase was primarily due to higher overseas sales, but also included an improvement in the U.S. and Canada. For the year, the increase was due to higher overseas sales, especially in Europe, where the company introduced a record number of new products.

According to John McGinty, analyst at Credit Suisse First Boston, Deere continues to cut costs and focus on returns. “However, everything hinges on the timing of the market recovery,” he says. “With half their sales and three-quarters of the profit traditionally coming from North American farm equipment sales, they need North American demand to pick up to improve profit potential.”

What drives success at John Deere? “New product introductions over the last couple of years are creating a lot of opportunities for us,” says Doug DeVries, Deere's senior vice president of agricultural marketing worldwide. “A couple good examples are the new 20 series tractor line, with innovations such as our Infinitely Variable Transmission, TLS II front axle suspension, active seat, and new powershift, and our line of self-propelled forage harvesters.”

The company's Ag Management Solutions group continues to develop new products to help track and report field operations.

Deere also offers complete packages of solutions before and after the sale, such as credit capabilities, maintenance programs and product support. For more information, visit your local dealer or www.deere.com.

CNH Global

Although most ag equipment companies face financial challenges, CNH Global has a dual challenge. Not only is the company struggling to reduce its own debt load (it did reduce its debt-to-capitalization ratio by one-third in 2002), but Fiat (which owns 85% of CNH) is itself struggling to stave off creditors.

As this February issue went to press, creditor banks, the Italian government, the Agnelli family (Fiat founder, 30% owner) and other investors (General Motors) are trying to find a solution. According to the latest reports in Europe's leading business newspaper Financial Times, creditor banks were weighing numerous options, such as spinning off the losing auto division into a holding company and selling the aeronautics division, but there was no reported speculation of a possible sale of CNH.

Despite all the talk, farm equipment industry analysts believe that CNH will survive.

“If you look at Fiat, aside from the car company that they may or may not keep, what else do they have?” asks John McGinty, analyst at Credit Suisse First Boston. “I think there's no doubt that in any kind of financial restructuring of Fiat, the share equity and debt they have in CNH would be preserved because otherwise you destroy the value of the equity if you call the debt, because you force a liquidation of the company. That's not going to happen.

“I don't think there's any question that CNH will survive and go on,” he adds. “And I believe an ownership change is highly unlikely because there isn't anyone out there in a position that will want to buy them.”

Ask either New Holland's Vice President Allen Rider or Case IH Vice President Jim Irwin, and they'll both tout their commitment to the long haul. “Our merger occurred in late 1999 because it was needed for both companies,” Rider says. “The larger the merger, the more time it takes to be able to gain all the synergies and get all the processes in place. We're making progress on resolving our debt, and there's no reason for concern. With our combined size, we can be a long-term, financially sound company.”

“This is a work in progress,” Irwin adds. “We're continually investing back into the business, as our R&D expenditures, as a percentage of sales, are equal to our competitors'. We have chosen not to make short-term gains by cutting back on R&D, which should offer proof of our long-term commitment to our dealers and customers.

“By next year, we will have replaced 97% of our product line with new products since CNH was formed,” Irwin says. And New Holland will have replaced 90% of its product line by next year, according to Rider.

A few of the products driving customer excitement for Case IH, Irwin says, are its 1200 series planters with the ASM metering system, improved Early Riser row units, and the STX Steiger and Quadtrac 4-wd tractor lines.

Another innovation is a new laptop-based electronic service tool for dealers, allowing easier diagnosis of problems. For more information, visit your local dealer or www.caseih.com.

On the New Holland side, Rider says recent new product introductions in combines and tractors are driving excitement. “With the introduction of our new CR Twin Rotor combines, we now have more models than ever, including conventional threshing machines. Our new TG and TM tractor lines, combined with the TJ four-wheel-drive machines we introduced last year, give us a complete line of tractors with unique features found only at New Holland,” he says. For more information, visit your local dealer or www.newholland.com.