Industry Analysis: US Farm Equipment & Agriculture Technologies Reveal Upside To Global Market Demand
Going into this weekend there was a story that just barely slipped by in the world of international business news
It was reported on 28 September 2023 that “AGCO to Acquire Trimble Ag Assets and Technologies Through a Joint Venture Focused on Next-Generation Precision Ag Technology.”
This JV proposes to investors that the combination of the two companies will create “an industry leading global mixed-fleet Precision Ag platform.”
AGCO and Trimble are two of the leading US agriculture companies in their respective market segments. AGCO is a farm equipment manufacturer, while Trimble is a technology provider for precision-agriculture services.
According to terms of this deal, AGCO gets to acquire 85% of shares in Trimble, a NASDAQ-listed company on the New York Stock Exchange (NYSE), in exchange for $2.0 billion and access to JCA Technologies.
Although the financial conditions of the deal have been met by AGCO, however, the deal must go through a regulatory approval and customary closing conditions process before being implemented by mid-2024.
On the day of the announcement, Trimble CEO Rob Painter made it clear why the ag-precision tech company decided to go with AGCO’s offer:
“Farmers today are looking for mixed fleet solutions across their tractors and the implements that they use to most efficiently and sustainably feed the world. We believe a joint venture with AGCO, complemented by the successful mixed fleet approach that they have developed with their Precision Planting business model, can help us better serve farmers and OEMs together.”
Let’s dive deeper into the US farm equipment and agriculture technologies industries, by looking at John Deere and Caterpillar, to understand how this purpose is being viewed on global markets.
Agricultural and Industrial Bellwether of 2023
John Deere has been reported by Seeking Alpha as the company to lead in all industrial stocks going into 2023. The outlook is based on stronger farm equipment sales, higher grains prices and thus overall better profits for the equipment manufacturer and retailer.
According to a report by Reuters, part of John Deere’s success will be in overcoming supply chain constraints that have had an impact on the company’s business as a result of ongoing parts shortages for farm and construction equipment since the outbreak of Covid-19.
Regarded as an agricultural and industrial bellwether, it was reported that John Deere has outpaced its rival in the construction and farm equipment sector — Caterpillar — to become largest farm and heavy construction equipment company by market capitalization.
Matt Arnold of Edward Jones is considered to be one of the leading voices on the trajectory of John Deere’s stock price and earnings outlook. You can read one of his latest stock reports about the company here.
There’s also a strong link between equipment manufacturing and global commodity prices. In the case of John Deere, grain and fertilizer price volatility are crucial to their bottom lines.
After Russia’s invasion of Ukraine on February 24, 2022, senior VP of the Association of Equipment Manufacturers (AEM), Curt Blades, told reporters at DTN/Progessive Farmer:
“Strength in the commodities markets is continuing to drive a lot of the sales growth, which we see in that continued growth in bigger row-crop units. And with fuel prices seeming to be on their way up for the foreseeable future, it’s possible even more farmers will want to get in on the efficiencies that new equipment has to offer.”
Mark Stock, CEO of used farm and construction equipment auction platform, Big Iron Auctions, asserted that the demand for used machinery skyrocketed soon after the Russia-Ukraine conflict. He shared some insights about the data gathered from the online auction platform, noting that a 2012 model-John Deere 9460R, increased in value to $176,000.
However, I’d point out that one aspect that shouldn’t be overlooked is about how much the company has evolved since the arrival of CEO John May on 4 November 2019.
For instance, on 26 February 2020, John May pointed out that the company was most interested in expanding on three key points: innovation and ag-precision technologies, raising earnings forecasts to unprecedented levels and making acquisitions to increase scale (i.e. John Deere acquired Wirtgen Group to grow on its construction and forestry business). Read more about John May’s background here.
The company has not taken its technological ambitions lightly. John Deere published a strategic plan to shareholders in February 2022 which included announcements to increase product autonomy, connectivity and sustainability to build on the company’s reputation as a global leader in the farming and construction sectors.
To this point, CEO John May was selected to be the first keynote speaker for the Consumer Technology Association (CTA 2023) in 2023. In response, the CEO said:
“The opportunity for technology and sustainability to positively impact the world is most present in agriculture, where farmers continue to be challenged to feed our growing population. John Deere is focused on developing technology with a purpose, to make our customers more efficient and sustainable. The work they do affects every single person and we’re honored to have the opportunity to help tell their story on the mainstage.”
Notably, Matt Arnold of Edward Jones told reporters at the Chicago Business Journal that global demand for John Deere’s products should benefit from three factors affecting global markets — higher grain prices, economy recovery and infrastructure investments.
Since 2022, John Deere has also invested in its fleet of autonomous machinery.
But no one expected this: on 8 January 2023 a memorandum of understanding (MoU) was signed by the American Farm Bureau Federation (AFBF) and John Deere over the right to repair (R2R) law. The outcome of this agreement was a big win for American farmers, but also calls into question future regulatory barriers that could prevent John Deere from following through on the deal.
The MoU was originally signed at the 2023 AFBF Convention in San Juan, Puerto Rico. You can watch the official announcement on RFD TV.
According to the MoU, John Deere will now allow farmers to access the company’s diagnostic and repair codes, manuals for parts and services, as well as product guides. It also ensures farmers that they will be able to purchase diagnostic tools from John Deere and also receive assistance from the manufacturer about ordering parts and products.
This aspect has been a disaster for both manufacturers and suppliers since parts shortages became a critical problem for farm equipment during the Covid-19 pandemic.
Caterpillar Shares Concerns About China’s Economy
While all of the talk about China’s re-opening for the global economy has centered on commodity market prices and freight competition, Caterpillar CEO Jim Umpleby is added on to the list of concerns by warning of softer demand from China for the company’s machinery and industrial equipment.
Bloomberg noted that because of softer demand for Caterpillar’s industrial equipment, this could mean that China is not ramping up its construction and manufacturing sectors as many CEOs had hoped for in this phase of China’s re-opening in 2023.
Caterpillar is the world’s leading brand for industrial equipment. The company announced plans to move its global headquarters from Deerefield, Illinois to Irving, Texas on 14 June 2022. The company made $59.4 billion from sales and revenues of its construction, energy and mining equipment in 2022. Basically, if there’s plans for a new construction project, energy pipeline or mining venture, the famed CAT logo won’t be far from the ground.
Any development project will have to figure in how to get the right industrial equipment for the job in the blueprint. Caterpillar provides a reliable brand, with equipment models that serve a diverse range of energy sources, such as off-highway diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.
For these reasons, China is a very important customer for Caterpillar.
Not only is the People’s Republic of China (PRC) the world’s largest consumer of global commodities, but it also the world’s leading global manufacturer. And with a population that is growing along with the country’s fast economic growth, demands for modernity and new lifestyles have posed a serious dilemma to China’s construction and property sector.
After reporting the Q4 2022 earnings, CEO Umpleby said, “Our global team delivered one of the best years in our nearly 100-year history, including record full-year adjusted profit per share.” These efforts were brushed off by investor analysts following industrials who believe that Caterpillar’s outlook has become uncertain on the news about China’s soft demand.
The Investor’s Business Daily put the CAT stock “out of the buy range” on the New York Stock Exchange (NYSE) for at least Q1 2023. The CAT stock had been one of the leaders of the industrial stocks throughout 2022. It initially began rising steadily at in H1 2021, going from $182.84 on 1/31/2021 to $244.02 on 06/06/2021. At this peak, it declined for most of H2 2021.
CAT picked up steam again in Q1 2022 hitting a price of $228.94 on 01/16/2022. After some months of volatility throughout H1 2022, the CAT stock soared from $164.08 on 10/02/2022 to $236.49 on 11/13/2022. It reached an ultimate high of $264.54 on 01/29/2023 before dropping to $247.79 on 02/18/2023.
Edward Jones analyst Matt Arnold attributed CAT stock’s perfomance to high hopes on China’s re-opening for the domestic construction sector at the beginning of 2023. But that the lack of China’s demand for Caterpillar’s excavators — considered to be a benchmark for the company’s manufacturing output in the China market — caused heightened concerns for industrial economic factors during the re-opening phase in 2023.
If we look back at the company’s trajectory since 2021, it’s easy to see that Caterpillar’s sales growth to mining and energy players were already outweighing the construction sector demand for industrial equipment. Notwithstanding supply chain issues for manufacturing, which have persisted since the outbreak of Covid-19, the demand for Caterpillar’s bulldozers, mining trucks and more were already in high demand as the global economy prepared for a recovery from the global pandemic.
Caterpillar’s sales growth in 2021 was actually being led by construction equipment sales of $11.2 billion, of which 72% of sales went to its Asia-Pacific market customers. Headwinds for Asia-Pacific markets were largely offset by strong demand for new energy and mining ventures kicking off around the globe in 2022. Caterpillar rocked Wall Street when it reported net income of $2.04 billion Q3 2022.
Caterpillar’s optimistic outlook in 2021 from increasing demand for construction equipment, to new tailwinds from energy and mining equipment markets in 2022, were putting the company in good shape across its broad portfolio of construction, manufacturing and resource industries entering 2023.
So what’s going to happen next?
Well, again, China’s re-opening scenario matters greatly. CEO Umpleby told Reuters after reporting Q1 2023 earnings, ”We talked about the fact that China is slow and we continue to expect it to be slow — below 2022 levels.”
A review of China’s manufacturing output in Caixin China General Manufacturing PMI was published on 1 Feburary 2023. According to the data about China’s manufacturing output collected by S&P Global Platts, the strong points were in supplier delivery times and future manufacturing output, while labor ineffeciencies due to Covid-19 infections and the cost of raw materials were some of the weakest points.
Going back to an article published in CNBC on 21 January 2019, CEO Umpleby shared some insights on demand for construction equipment in Asia-Pacific, when China’s weaker demand was once again the topic of discussion. In repose, he said: “Our outlook assumes a modest sales increase based on the fundamentals of our diverse end markets as well as the macroeconomic and geopolitical environment.”
This means that when sales of construction equipment are likely decline, the company will be relying on tailwinds from global energy and mining projects for the company’s industrial equipment sales. In the near-term outlook, this means one thing: the company’s revenues and profits are highly susceptible to global commodity market prices and volatility.
When commodity prices are high, more demand for energy and mining companies will put Caterpillar back in business to meet resource demand. But while global commodities remain volatile to geopolitical scenarios, this is an extremely scary outlook for Caterpillar — in view of the long-term markets for industrial equipment in the future.
In today’s world it is clear that technological innovation is critical to achieving success during global volatility in markets. Stock prices and a company’s value will continue to be affected by geopolitical trends as a result of the Russia and China exposure to energy, industrials and global commodities.
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