UBS Securities is out with its latest take on the farm machinery sector, saying it’s likely to be another difficult year for the industry given depressed levels of farm commodity prices.
Analyst David Bleustein says that while he’s expecting commodity farm prices to increase next year, the benefits of higher forecast prices might not impact demand until later in 2007 or even into 2008, while elevated input costs like fuel and fertilizer, higher interest rates and uncertainties surrounding a new farm bill continue to restrain demand.
In all, he sees farm machinery demand flat to down slightly next year, with a weaker first half offset by a stronger second half of the year.Bleustein expects an even tougher year for light construction equipment demand, which will be hit by the flattening out of spending by major rental industry players and by a softer housing market. That weakness will offset expected improvement in non-residential construction activity.
“Given very difficult light construction equipment sales comparisons from 2007 (especially in the first half), coupled with our forecasts for lower housing starts and flat rental company capital spending, we expect a 5-10 percent decline in sales of light construction equipment in the U.S. in 2007, despite higher levels of non-residential construction activity, which we believe will provide more support for larger pieces of construction equipment,” Bleustein said.
He thinks current consensus earnings estimate for Agco, CNH Global and Deere are too high, but he remains hopeful for 2008 results.
While noting there are plenty of variables that could come into play with regard to 2008 sales (weather, final demand for farm commodities, and a resolution of the next farm bill), he sees machinery sales up 10 percent that year, helped not only by a surge in farm commodity prices but also moderation in both energy prices and interest rates.
His outlook for light construction equipment isn’t as optimistic, as he expects a 5 percent decline in 2008 on continued housing pressure and a deceleration in non-residential construction.
On the corn front, Bleustein says supply/demand fundamentals could drive corn into a shortage position, as demand next year may be too strong for production to keep up. He expects corn planted acreage of 82 million acres, which would be the highest level since at least the 1980’s, and compares to 79.4 million acres last year.
He sees total corn consumption up 4 percent in 2007, driven in part by increased ethanol production.
Indeed, over the past several weeks a handful of companies have commented on the strength they’re seeing on ethanol demand, including Archer Daniels Midland, Trinity Industries, VersSun Energy, and Aventine Renewable Energy. On an Aug. 3 conference call, Trinity said it expects ethanol production to “rapidly surpass the government-mandated level of 7.5 billion gallons in 2001,”and said “growth in renewable fuels, particularly ethanol and bio-diesel, has caused a surge in rail-car demand.”
Bleustein estimates 2006 ethanol production could jump by 1.375 billion gallons, translating into incremental demand for corn of about 550 million bushels this year.