Short-Term Pain, Long-Term Gain Scenario for Deere
Ag economy barometer
After three consecutive months of declines until March 2016, the index has rebounded from a reading of 85 in March to 112 in July. The index had a reading of 104 in June. Components related to the computation of the index reveal that producers’ overall outlook toward future conditions has improved. It has been stable compared to the outlook of current conditions which has been volatile. The outlook toward future conditions is basically a measure of the outlook in the next five years. The current conditions index looks at the short-run view in the next 12 months. The index of current conditions fell from 98 in June to 93 in July. The index of future conditions rose from 107 to 121 month-over-month.
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Why did sentiments fall?
Sentiments regarding current conditions were hit as the rally in corn, soybean, and wheat prices came to an end in July. Soybean futures had reached levels not seen before June 2014—they fell 17% since their peak in June 2016. Despite the slump, soybeans are up 17% YTD (year-to-date). On the other hand, corn futures are down 24% since their peak in June—their YTD prices have fallen by 10%. Purdue University’s report stated that the ability of crop prices to trade at levels that were substantially higher than last year improved the outlook towards future economic conditions in the sector.
Future outlook improves
When asked about producers’ financial situation for the next 12 months, 69% of producers surveyed said they still expect bad times ahead. However, producers are more positive about prospects in the next five years. Only 40% of the surveyed producers expect bad times over the long term. In April 2016, the percentage of producers expecting bad times was 58%.
Overall, we might conclude that while yields are improving and farmers are producing more, low prices on produce will likely to keep farm incomes low. This means that manufacturers’ equipment sales such as AGCO (AGCO), CNH Industrial (CNHI), and Deere (DE) likely won’t improve without a stimulus to farm incomes.