John Deere and the downside of an abundant harvest

After years of sustained growth, John Deere has now seen its sales fall significantly in each of the first three fiscal quarters of 2014. Photo / Getty Images

This year hasn't been kind to the US agricultural sector.

Just ask John Deere, the world's largest manufacturer of farming machinery. The company reported a 15 per cent plunge in profit for its fiscal third quarter compared with the previous quarter on Wednesday. After years of sustained growth, the company has now seen its sales fall in each of the first three fiscal quarters of 2014 and each time significantly.

Tractor sales, which are often used as a barometer of agricultural sector health, have been especially weak in the US. Deere's equipment sales fell by 6 per cent in the third quarter, and are expected to tumble by another 8 per cent in the fourth quarter.

And next year isn't likely to prove any more promising. Deere is already forecasting an even tougher 2015 - the company expects to sell even fewer tractors than it will by the end of 2014.

The struggles of one of the country's largest farming equipment suppliers isn't so much an isolated business dip as it is an ailment emblematic of the farming industry at large.

America's entire agricultural sector, as it happens, is having a pretty mediocre 2014 (and equally mediocre feeling about 2015, for that matter).

Industry-wide sales are slated to fall by more than 6 per cent this year.

Plummeting profits

And US farmer profits are expected to plummet by nearly 27 per cent in 2014 after several years of historic highs, according to USDA estimates from earlier this year.

The dip is almost entirely due to pinched crop sales, which are expected to fall by more than 12 per cent this year, after falling by just over 3 per cent in 2013. If that holds, US crops will generate just under $190 billion in 2014, or almost $35 billion less than in 2012.

But American corn and soybean farmers aren't suffering because they're struggling to grow corn and soybeans; rather, they're seeing the repercussions inherent in production too much of them.

"If you look around the country, it's pretty hard to find a bad corn crop right now," Gregory Ibendahl, associate professor of agricultural economics, said in an interview. This year's corn crop, as it turns out, is going to be the largest in history, according to USDA estimates. The same is likely to be true of 2014's soybean output (paywall).

"The problem is actually corn and other crop prices," Ibendahl said. "They're too low right now."

Healthy harvests

Healthy American harvests are driving prices down significantly. Corn, wheat and soybean prices have fallen by 35 per cent, 12 per cent, and 13 per cent, respectively, this year, and are forecast to fall even further in 2015.

That's too cheap for American farmers' liking. In some cases, the weak prices are even causing farmers to sit on their produce until prices improve.

"Either through permanent or temporary storage, you're going to see huge quantities going into storage," Scott Irwin, professor of agricultural and consumer economics at University of Illinois, told the Associated Press on Wednesday. In others, farmers are selling their crop, but at severely discounted rates that border on being unprofitable.

Broadly speaking, record harvests are rarely bad news. "As a farmer, you can't do anything about prices," Ibendahl said. "All you can do is try to produce as much as you can in any given year." Large stockpiles of corn today should give way to commensurately large cash piles of profit down the road, even if it means storing much of it until prices recover.

Devastating low prices

But low prices can be devastating, especially if they sustain themselves over long periods of time. "If you're a farmer facing continual low prices, you might have to take some land out of production." Ibendahl said. "Somewhere along the line you might even reach a point where you have to go out of production."

The US farming sector is not quite there yet - the point at which those farms that are most affected can no longer afford to stay in business - but that doesn't mean there isn't potential for such a scenario.

"I think it [low prices] will continue for a lot longer than most people think it will," Ibendahl said. American farmers certainly hope that doesn't prove to be the case; nor do tractor manufacturers like Deere.

- Washington Post