Year for Ag Equipment Sales While Overall North American Sales of Extremely Low Inventories of Equipment in 2009

December 15, 2008 Vol. 15, Issue 8

• Russia to Add Duties? • Art’s-Way’s New Plant • Titan’s Revenues Up

Most Still See a ‘Solid’ Year for Ag Equipment Sales While overall North American sales of Extremely low inventories of equipment in 2009. “One of the fac- farm equipment slowed somewhat good used equipment are also expect- tors in the increased dealer sales lev- (down 1% year over year in ed to help prop up sales of new els during the past 2 years has been November), most industry observers Continued on page 8 continue to see 2009 producing solid results for ag machinery. ROLLING 12 MONTHS’ RETAIL As total unit sales slipped, row- SALES OF ROW CROP TRACTOR (Over 100 HP) crop tractors (>100 horsepower) were up nearly 13% and sales of 4WD tractors rose more than 24% compared with November 2008. (For more detail, please see page 7.) Despite OEM constraints and “an increasingly difficult macroeconomic environment,”Henry Kirn, machinery analyst for UBS Investment Research, told investors, “We expect U.S. farm machinery sales to remain solid, driv- en by still healthy farm commodity prices, solid farmer balance sheets and expected record levels of farm Source:AEM and UBS Estimates income.” Two of the largest makers of ag EQUIPMENT VS. MARKET VALUE OF CROP equipment also told AEI that a robust “presell” season has produced strong (CORN + SOYBEAN + WHEAT) SUPPLY order books for the new year. They also noted that extremely low used equipment inventories — due in large part to new equipment shortages throughout 2008 — also increases demand going into 2009. Strong Going In. “Pre-sell pro- grams on the high-horsepower equipment look very strong for the first 6 months,” says Jim Walker, vice president of Case IH North American Agricultural Business. “Farmers tradi- tionally purchase input costs for next year by this time, and many booked a U.S. retail unit sales of high-horsepower 2WD (>100 HP) + 4WD Tractors + Combines LTM (left axis) Projected LTM Sum of high-horsepower 2WD + 4WD Tractors + Combines unit sales at retail portion of next year’s crop at a favor- U.S. Corn + Wheat + Soybeans Market Value of Supply in Billions of $ moved forward 2 years able commodity pricing. With that, Fig. 1. The value of U.S. crop production (lagged 2 years in this chart) aligns with past peaks for most farmers remain willing to make unit sales of high-horsepower U.S. farm equipment. In the past two cycles, 1990 and 1998, sales investments for core products for the of this equipment did not peak until crop values, moved forward 2 years, peaked, which implies first half.After that, we expect there to sales should rise strongly until the first half of 2010. “We remain bullish on energy prices and thus be a ‘wait and see’ attitude,”he says. crop values as we look to fiscal year 2009,” says Barry Bannister of Stifel Nicolaus.

The contents of this report represent our interpretation and analysis of information generally available to the public or released by responsible individuals in the subject companies, but is not guaranteed as to accuracy or completeness. It does not contain material provided to us in confidence by our clients. Individual companies reported on and analyzed by Lessiter Publications Inc., may be clients of this and other Lessiter Publications Inc. services. This information is not furnished in connection with a sale or offer to sell securities or in connection with the solicitation of an offer to buy securities. Russian Prime Minister Proposes Temporary Duty on Ag Equipment Imports Following a visit to Rostselmash, one exempt from the duty,he added. Rostselmash in NA. of Russia’s largest makers of farm Russia’s Industry and Trade Rostselmash claims to be the biggest equipment and a major employer in Ministry may allocate $11-18 million in combine manufacturer in Russia, the Rostov region on December 10, 2009 to subsidize interest payments on Ukraine and Kazakhstan, with a 65% Russian Prime Minister Vladimir Putin loans taken out by Russian agricultural market share in these three countries. proposed a temporary customs duty equipment producers to upgrade their In October 2007, the Russian firm on imports of agricultural equipment production facilities, Putin said. acquired Buhler Industries of in order to support domestic produc- However,the government will not sub- Winnipeg, Manitoba, best known for ers, according to a December 11 sidize interest payments on loans taken its Versatile brand of high-horsepower report from Prime-Tass, Russia’s busi- out to buy foreign agricultural equip- tractors, which are ideally suited to ness news agency. ment, he said. the Russian market. In large part, the “I think that it is possible during Falling Equipment Sales. The acquisition was made to enable the financial crisis to support domes- Rostselmash plant in Rostov-on-Don Rostslemash to export tractors to the tic producers of agricultural equipment has laid off 1,300 of its 11,000 work- former Soviet Union. by raising custom duties on imports of ers as demand for machinery plum- In an interview with AEI last new and used agricultural equipment mets amid growing uncertainty for spring, Dmitry Lyubimov,president of for a period of 9 months,”Putin said at a Russia’s agricultural producers. Buhler Industries, said that the heavy meeting organized to discuss measures The factory has been hit hard as tractor market in Russia was growing to help Russian agricultural equipment farmers face difficulties raising credit, 33% annually. (See 8 Months Later: makers. with many simply abandoning plans New Buhler President Discusses The proposed import duty would to buy new equipment. Changes, June 2008 Ag Equipment be 15% of the equipment’s customs “We are not going to see a rise in Intelligence, pages 3-4.) Adding trac- value, but no less than 120 euros per equipment purchases,” said Ivan tors to the Rostselmash product line 1 kilowatt ($161 per 1.34 horsepow- Nikolayev, an analyst at Renaissance would help the firm maximize signifi- er) of engine capacity, Putin said. Capital.“Farms are going to spend the cant growth opportunities ahead. Imports of parts required by Russian little money they have just to sow Following the acquisition of producers of farm machinery will be crops and survive.” Buhler,the firm dispelled rumors that Russia has witnessed massive lay- it was planning to move production Sources of Farm offs as big industrial enterprises move of the Versatile tractors to Russia. to slash production amid plunging Lyubimov told AEI, “We’ve invested Credit in the U.S. demand for metals, construction mate- $140 million in the facility,technology Farm Service Life Insurance rials and other industrial goods. and people.This facility has very good Agency Companies The Kremlin has pledged to capacity — 40 tractors per day. It 2.5% 5.3% increase pensions and unemployment wouldn’t make any sense to move it.” benefits while at the same time invest- He also said that Buhler planned ing huge amounts of cash to shore up to ship 55% of the tractors overseas, Individuals its shattered banking system and bail with 45% reserved for North America. and Others Commercial out indebted companies. It has also He expected that percentage to remain Banks 17.2% 42.4% spent tens of billions of dollars prop- about the same in 2009, though the ping its national currency. company was ramping up tractor pro- Farm Credit The government will also inject duction by nearly 50%, which means System 32.6% $900 million (25 billion rubles) into more units would be available for U.S. Rosagroleasing, a state company that and Canadian dealers. leases agricultural equipment. It’s not clear if the proposed duty In addition, the government will would be applied to products manu- Source:American Bankers Assn. consider injecting more capital into factured by Russian-owned companies Commercial banks and the farm credit sys- Rosselkhozbank, the state-owned that are based in other countries, like tems account for 75% of farm credit and Russian Agricultural Bank. Buhler. lending in the U.S.

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2 Ag Equipment Intelligence/December/2008 Art’s Way Opens Grain Auger Facility in Now-Defunct Feterl Mfg.’s Backyard Publicly-traded farm equipment man- ucts and service of the dealers and newspaper, civil documents from the ufacturer Art’s-Way Manufacturing Co. farm customers. 1st Judicial Circuit Court filed in Inc., Armstrong, Iowa, announced on The expansion into portable grain McCook County describe 25 Feterl December 3 that it formed a new augers expands Art’s-Way’s product customers in South Dakota and sev- location in Salem, S.D., to produce line and provides greater access to the eral other states who allege that the grain augers. large grain producer market.Within a company accepted payment for, but Salem is the same town where week of the announcement, failed to deliver, $1.2 million of pre- the 50 year-old Feterl Manufacturing, McConnell says the company has paid farm equipment orders. which closed in October, was locat- received positive feedback from near- According to court documents, Feterl ed. J. Ward McConnell, Jr., Art’s-Way ly half of the 277 Feterl dealers owes at least $2.48 million to a total chairman, told AEI that former Feterl who’ve expressed an interest in doing of 45 prepaid customers, including employees approached the firm about business with Art’s-Way for parts and the 25 who have filed the lawsuit. setting up a division and locating it in wholegoods. With the financial mess sur- Salem, where a workforce skilled in The closing of the Feterl facility is rounding Feterl and the potential grain auger production was readily a culmination of problems in recent judgment against its properties, sort- available. years, which had also closed in 2001 ing out the fate of the Feterl assets The company has rented a 15,000 before reopening with different could take time. With Art’s-Way now square-foot facility that is already open investors.The plant laid off nearly half operating in the area, the company and shipping parts.“It’s big enough to of its 100 employees again in 2006. would be a natural candidate for any get started,” says McConnell. He said The Argus Leader has reported physical assets that go to auction the immediate focus is meeting the on the lawsuits filed this fall against should foreclosure be the next course urgent needs for parts, finished prod- Feterl management.According to the of action. Mahindra Cuts Farm Equipment Output Due to slowing demand, Mahindra & activities at plants at Kandivali, decline. In October, Mahindra’s trac- Mahindra announced that it would Nagpur and Rudrapur during the tor sales at 11,539 were marginally cut production in its farm equipment month of December.” higher than the year-ago period. division, according to a December 12 Although Mahindra’s farm equip- “We expected much bigger sales in report in India’s Business Line. ment sector posted a 2% cumulative October and November.We developed In a published statement, growth by selling 70,288 tractors inventories.So we are taking corrective Mahindra said,“In line with the sup- from April to November this year, the measures,”said Gautam Nagwekar,COO pressed market demand for tractors sales of late started showing a declin- of Mahindra. and taking into account the inventory, ing trend. “We are aligning production with the farm equipment sector of the In November, sales fell to 5,487 the downturn in the market,”he said.A company has made necessary adjust- units from 8,062 during the same 30% production cut in December was ments to moderate its manufacturing month last year, showing a 32% anticipated.

FARM MACHINERY TICKER (AS OF 12/15/2008) 12/15/08 11/11/08 1-Year 1-Year P/E Avg. Market Mfr. Symbol Price Price High Low Ratio Volume Cap.

AGCO AG $21.47 $26.28 $71.94 $21.27 5.61 2.60 M 1.97 B Alamo ALG $12.27 $11.41 $26.46 $10.63 7.56 79,626 121.64 M Art’s Way ARTW $3.94 $4.27 $19.52 $2.92 6.92 18,826 15.66 M Caterpillar CAT $42.21 $36.88 $85.96 $31.95 6.95 12.6 M 25.46 B CNH CNH $15.72 $16.32 $70.00 $11.00 4.52 511,418 M 3.73 B Deere DE $36.36 $35.12 $94.89 $28.50 7.73 7.6M 15.35 B Kubota KUB $31.41 $27.29 $43.41 $17.72 12.08 62,501 8.03 B Titan Mach.* TITN $14.10 $11.49 $34.49 $7.75 17.94 374,235 248.67 M * Titan Machinery undertook its IPO with approximately 6 million shares on December 6, 2007 at $8.50/share.

Ag Equipment Intelligence/December/2008 3 Montana Tractors Closes on Farmtrac Acquisition USDA Raises While it looked like LS Mtron,the South tion did not include any of the com- Ending Corn Stocks Korean manufacturer of Farmtrac and pany’s $52 million outstanding debt, Forecast by 31% other compact tractors sold in the U.S., much of which was owed to Textron had the inside track in acquiring the Financial and LS Mtron. It appears that USDA raised its forecast of 2008-09 assets of bankrupt Farmtrac North Montana’s acquisition will be more ending corn stocks to 1.474 billion America LLC, a surprising eleventh- advantageous for Textron. Book value bushels, from 1.124 billion bushels, hour bid of $14.1 million gave the sale of Farmtrac’s assets was estimated at as lower forecasts for ethanol use to Montana Tractors of Springdale,Ark. $16 million, which represented and exports offset a higher forecast On December 1,Montana Tractors machinery, real estate and inventory, for feed and residual use. announced that it had closed on the including farm tractors and other vehi- It also raised its wheat ending acquisition of Farmtrac’s assets located cles, parts and an in-house dealership. stocks forecast to 623 million in Tarboro,N.C. According to published reports, bushels from 603 million bushels, Montana believes that the acqui- Farmtrac was the eighth largest brand but maintained its soybean ending sition of assets should allow its dealer of farm tractors in North America, stocks forecast at 205 million network to remain competitive dur- with 2007 sales of 3,650 units, bushels. ing a very tough economy. accounting for 1.5% share of overall It’s believed the Montana acquisi- industry-wide business.

Look for Producers to Increase Soybean Acres in 2009

Rising production costs and uncertain 2008. However, harvested acreage says Suderman. profit margins have risk-averse farm- might actually increase, because As a result, soybean acreage could ers ready to cut corn plantings in severe flooding caused farmers to increase to a record 80.1 million acres 2009 in favor of soybeans, which abandon an unusually high number of in 2009, a jump of more than 5%. In could see another substantial jump fields last year. addition to shifting corn acres, soy- next spring, according to the results Tight stocks also raised the ratio beans could pick up ground from of the latest Farm Futures survey of soybean-to-corn prices to encour- wheat, cotton and land coming out of released on December 11. age farmers to plant 20% more soy- the Conservation Reserve Program. The email survey included bean acres. The survey also puts wheat responses from 840 growers received Current soybean-to-corn ratios acreage at 61.7 million acres, down between November 24 and actually favor corn, says Arland 2.2% from 2008. Winter wheat seed- December 8. Suderman, Farm Futures market ana- ings appear to be down the most, to The survey projects that corn lyst.“But, in these uncertain times, pro- 45 million, compared to 46.2 million acreage could fall 1% to 85.1 million ducers appear reluctant to invest the last fall, with spring wheat and durum acres, down from 85.9 million in extra dollars needed to plant corn,” each declining around 1%.

AEI Copyright TAFE Plans New Tractor Plant in Turkey Notice Chennai, India-based Tractors and Over 2000 TAFE tractors are already in Farm Equipment Ltd. (TAFE) operation in Turkey, giving us a good Ag Equipment Intelligence is a announced that is investing in a understanding of the market and its copyrighted publication of Greenfield plant in Manisa,Turkey, to needs. Turkey is an investor-friendly Lessiter Publications. Copying an manufacture 15,000 tractors a year, country and we have been welcomed entire issue to share with others, according to published reports. and facilitated in our investment pro- by any means, is illegal. TAFE claims to be the second posals by the authorities in Turkey. Duplicating of individual items for largest manufacturer of tractors under “With this support we expect the internal use is permitted only with 100 horsepower with production and first tractors to roll out of the new permission of the publisher. sales of nearly 80,000 tractors per plant in the first quarter of 2009.” Licensing agreements that allow year. TAFE manufactures a range of distribution of Ag Equipment Mallika Srinivasan, director of tractors that are being distributed by Intelligence to a specified number TAFE said, “The tractor market in AGCO in the American market.TAFE’s of readers are available by con- Turkey is of significance to us in that export revenues have seen consistent tacting Lessiter Publications at its composition is well within our growth year after year and have dou- 262-782-4480, ext. 408. experience and manufacturing range. bled over the past 3 years.

4 Ag Equipment Intelligence/December/2008 SDF and ARGO Enter Rotary Combine Market Acquiring the “know-how” of an have rotary grain and oilseed harvesters SDF harvester line, which was original- Argentinian combine has given Italy’s at the top of their ranges, with sales in ly built in Germany,then in Scandinavia Same Deutz-Fahr Group a rapid entry Europe accounting for more than a on a sub-contract basis and is now pro- into the high-capacity rotary market. quarter of the market. In areas with duced in an SDF-owned plant in The technical and commercial larger “professional” farms, the propor- Croatia in Eastern Europe. agreement signed with Vassalli Fabril, tion is much higher: in Great Britain, It is here that production and Argentina’s combine manufacturer for example, walker and rotary separa- assembly of the Deutz-Fahr 7500 with annual sales equivalent to $60 tion combines sell roughly 50/50. series combine will be established, million, was signed last May. But the Adding higher-capacity machines with Deutz engines replacing the two parties kept it under wraps until to the Deutz-Fahr range is an impor- Cummins unit used in the Argentinian the Vassalli AX 7500 axial combine tant part of a turn-around plan for the version. could be tested through a European harvest. Laverda Launches Rotary Combine Line “The agreement has now been made public following the positive Laverda, the ARGO Group’s crop harvesting arm half owned by AGCO, has outcome of performance, reliability launched its first rotary combine into the Italian market, trumpeting the North and quality tests,” says SDF CEO, American character of the machine, which is built in AGCO’s Hesston, Kan., plant. The same machine has been launched in selected Western European markets Massimo Bordi.“The ‘know-how’ relat- in Massey Ferguson and Fendt colors and in Eastern Europe through Challenger. ed to this machine is now the exclu- Laverda has been supplying AGCO with combines for the European market sive property of the two companies since 2004 and became a 50/50 joint venture last year. and our agreement will allow us to The Breganze plant in Italy built more than 800 harvesters in 2007 and was share future R&D investment.” scheduled to complete more than 1,000 by the end of 2008 to meet a continuing upswing in demand. The Italian combine market grew 36% this year and by 50% in All the major manufacturers sup- France, says Laverda CEO, Mario Scapin. plying Europe and North America now

GKN Targets North America for Significant Sales Growth British engineering group GKN, tractor attachment systems, trailer run- used by wheel loader and telehandler which identified North America as a ning gear and steel rims to OEMs. manufacturers. key element of its growth strategy for A strategic plan to rejuvenate the On the production front, an its OffHighway components division, division calls for less reliance on acquisition in southern China saw is seeing steady gains in sales and Europe and agriculture, concentration GKN Wheels Liuzhou start production profitability from the tractor hitches- on higher-value products, new tech- last year, joining existing manufactur- to-drivelines business. It’s a satisfacto- nology development and acquisitions ing operations for steel rims, tractor ry outcome for managers who previ- that would locate manufacturing attachment systems, driveshafts and ously saw a board-level decision to sell assets closer to customers. implement gearboxes in the U.S., the business. The balance is shifting: Europe Canada and Europe. “At the time, it was a predomi- now contributes 71% of revenues, Global production output, accord- nantly European, agricultural-biased down from 78%; the Americas 26%, ing to GKN’s 2007 annual review,runs operation recording flat sales at up from 21%. Further adjustment to 3.5 million steel wheels, 665,000 around the $405 million level,” toward increased sales in North drive shafts, 530,000 implement PTO explains sector CEO Andrew Reynolds America and Asia is planned. shafts, 120,000 tractor three-point Smith. “But after assessing various Agricultural OEMs, including most linkage sets and 150,000 tractor draw- bids, it became clear the value-cre- major tractor manufacturers and lead- bar/hitch assemblies. ation potential was greater through ing implement firms such as Claas, Sales last year represented 10% of retaining the business.” Kverneland, Krone and Kuhn, remain group revenues at $680 million, up There are two main strands to the the major customer base but new almost 19% from $572 million in business: distribution of non-GKN and business is being won from construc- 2006. First-half figures for 2008 show GKN products (such as Waltersheid- tion vehicle OEMs. revenues up 21% in North America branded implement PTO shafts and New power transmission prod- and 16% in Europe (with trading prof- other driveline components) to the ucts making headway include a novel it 19% ahead of 2007), as the business after-market through dealers; and sup- harvester transmission and the ICVD heads towards the $1.2 billion rev- plying drive shafts and gearboxes, high-torque hydrostatic drive being enue target set for 2012.

Ag Equipment Intelligence/December/2008 5 Two Russian Projects on the Drawing Board for SDF The announcement of plans to start “Our plan is to reach and quickly duce Class 6/7 combines using core local assembly of tractors and com- exceed a localized component value of technology components from the bine harvesters has underlined the 20%, with the longer-term aim of Italian group’s harvester factory in determination at the Same Deutz-Fahr increasing production capacity in Russia Croatia.Another would jointly produce Group to secure a solid foothold in along with the local added value to opti- wheeled tractors using SDF compo- the Russian market. mize production costs,”says Bordi. nents. The third project calls for the SDF chief executive Massimo SDF expects to sell around 300 company to jointly engineer a 350- Bordi has revealed details of two sepa- tractors in Russia and neighboring horsepower wheeled tractor derived rate projects — one for SDF to build states in 2009 and to increase this to from CTP’s crawler tractor design. Deutz-Fahr branded tractors in Russia; 1,500 by 2013. To underpin the plans, CTP’s dis- another to partner the industrial group In parallel, Same Deutz-Fahr has tribution arm, AgroMashHolding, has Concern Tractor Plants in the produc- signed a memorandum of cooperation agreed to a 5-year purchasing plan for tion of SDF tractors and combines to with Concern Tractor Plants, the the combines and 150, 210 and 270- be distributed under a local brand. group producing industrial, construc- horsepower tractors carrying the “We have always considered the tion and agricultural machinery that company’s own brand. Russian market to be one with the recently secured a deal to assemble In addition to the production highest potential and to be very and distribute AGCO Sisu Power plans, the proposed agreement would attractive for investment,”says Bordi. diesel engines in Russia. also see Same Deutz-Fahr supporting For its Deutz-Fahr tractors, SDF SDF and CTP will investigate the training of assembly and after-sales plans an assembly facility that will start three joint projects. One would pro- service employees. production of 165-270-horsepower models during the first half of 2009. At first, this will involve merely ARGO Planning Tractor Project with Kamaz completing tractors built in Germany The Italian ARGO Group is understood to be planning a 300-horsepower tractor by fitting locally-sourced components, project with its Russian partner Kamaz. ARGO Chairman Valerio Morra reportedly such as wheel rims, tires and hydraulic confirmed plans for the high-horsepower design to be delivered to Kamaz for test- fixtures and fittings. A more compre- ing by the end of 2009. Kamaz started final assembly of the 200-horsepower T-215 hensive second phase will involve build- tractor (based on the McCormick XTX215) earlier this year and is preparing to add ing tractors using major components a T-85 model. The two parties are looking into further cooperation on agricultural machine production with local Government officials. from Germany with local content.

Titan Machinery’s 3Q Revenues Rise 62% to $214 million

Titan Machinery, one of the largest lion compared to $6 million in the New Holland-brand ag equipment. It farm equipment dealer groups in same period a year ago. Pre-tax reported revenues of nearly $3 mil- North America, reported on income for the fiscal third quarter lion in its most recent fiscal year December 15 that its third-quarter increased to $13.9 million, compared ended December 31, 2007. revenues rose by 62% compared with to $4.5 million in the same period last Pioneer Garage Inc., with 3 stores the same period of 2007. year. Net income for the fiscal third in Pierre, Highmore and Miller, S.D., The company, which retails Case quarter was $8.2 million, compared retails both Case IH and New Holland IH and New Holland agricultural and to net income of $2.7 million in the farm equipment. It reported revenues construction equipment, said its 2008 third quarter last year. of $60 million in its most recent fiscal third-quarter revenue increased to First 9 Months. For the 9-month year ended September 30, 2008. $214 million from $132.2 million in period ended October 31, 2008, rev- Outlook. Based on better than the same quarter of ’07. enue increased to $501.4 million from anticipated third-quarter results and Equipment sales were $168 mil- $297.8 million for the same period increased growth expected in the lion, compared to $103.4 million in last year.Net income for the first nine fourth quarter,Titan raised its revenue the same period last year. Parts sales months of fiscal 2009 was $14.9 mil- outlook for the full year ending were $29.8 million in the third quar- lion, compared to $4.9 million, in the January 31, 2009 to a range of $635- ter,up from $18.4 million in the prior- same period last year. $675 million, compared to previously year period. Revenue generated from The company also closed on two issued guidance of $590 million to service improved to $12.9 million in acquisitions in the third quarter con- $635 million. the quarter,compared to $7.9 million sisting of four stores with historical It also raised its fiscal year end- in the third quarter of last year. revenues of $63 million. ing January 31, 2009 EPS guidance to Operating income for the fiscal Wolf's Farm Equipment Inc., with a range of $1.07 to $1.11 from a range third quarter increased to $14.2 mil- one store in Kintyre, N.D., handles of $0.89 to $0.94.

6 Ag Equipment Intelligence/December/2008 NOVEMBER U.S. UNIT RETAIL SALES Big Equipment Nov. 2008 November November Percent Percent Equipment YTD 2008 YTD 2007 Field 2008 2007 Change Change Sales Moderate Inventory in November Farm Wheel Tractors-2WD Retail sales of ag equipment slowed in November, according the latest Under 40 HP 3,854 5,176 -25.5 93,846 109,009 -13.9 55,154 sales figures from the Assn. of 3,135 3,817 -17.9 62,941 71,679 -12.2 32,775 Equipment Manufacturers. 40-100 HP “Retail sales comparisons gener- 100 HP Plus 1,214 1,078 +12.6 23,642 18,212 +29.8 5,466 ally moderated in November, though two fewer year-over-year selling days Total-2WD 8,203 10,071 -18.5 180,429 198,900 -9.3 93,395 this November exaggerated the decel- eration,”says Robert McCarthy,analyst Total-4WD 250 201 +24.4 4,046 3,292 +22.9 646 for RW Baird. “But even after adjust- Total Tractors 8,453 10,272 -17.7 184,475202,192 -8.8 94,041 ing for selling-day differences, large agricultural equipment unit sales vol- SP Combines 410 375 +9.3 7,521 6,194 +21.4 779 ume growth appears to be easing. While improved pricing can help offset moderating volume growth, risks NOVEMBER CANADIAN UNIT RETAIL SALES to 2009 agricultural equipment expec- Nov. 2008 tations appears to be increasing.” November November Percent Percent Equipment YTD 2008 YTD 2007 Field 2008 2007 Change Change • North American retail sales of row- Inventory crop tractors increased just 2% year- over-year in November, following a Farm Wheel Tractors-2WD 19% increase in October. Sales were up 26% in the latest 3-month period. Under 40 HP 764 758 +0.8 13,293 10,799 +23.1 6,437 Adjusted for fewer days, more com- parable sales growth likely exceeded 40-100 HP 769 713 +7.9 8,127 6,694 +21.4 3,482 10%. November typically contributes 100 HP Plus 321 424 –24.3 4,305 3,663 +17.5 1,168 only about 5% of annual sales. • Retail sales of combines declined Total-2WD 1,854 1,895 –2.2 25,725 21,156 +21.6 11,087 2% year-over-year vs. a 38% increase in October. This was the first negative Total-4WD 92 70 +31.4 1,040 695 +49.6 159 year-over-year comparison since April Total Tractors 1,946 1,965 –1.0 26,765 21,851 +22.5 11,246 2007.The last 3-month sales were up 39% year-over-year as November is a SP Combines 104 148 –29.7 2,064 1,506 +37.1 159 relatively unimportant month seasonally for combine sales after peaking 2008 seasonally in July-October. U.S. UNIT RETAIL SALES OF 5 year • Sales of 4WD tractors rose 26% in average seasonally less important November, 2-4 WHEEL DRIVE TRACTORS & COMBINES vs. a 9% decline in October. During 30,000 the past 3 months, 4WD tractor sales 28,000 were up 22%. 26,000 • Dealer inventories of large tractors 24,000 continued to decline year-over-year on both an absolute and days-sales 22,000 basis in October. Row-crop tractor 20,000 inventories fell 4% year-over-year on 18,000 an absolute basis to 76 days-sales vs. 16,000 106 days-sales in the prior year. • 4WD inventories fell 31% year-over- 14,000 year on an absolute basis — 54 days- 12,000 sales vs. 99 in October 2007, while 10,000 combine inventories declined 15% to 8,000 their lowest levels since at least 1993. Inventories fell to 34 days-sales from 6,000 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 49 in the prior year. —Assn. of Equipment Manufacturers Ag Equipment Intelligence/December/2008 7 Continued from page 1 how much used equipment has been PRODUCER PRICE INDEX FOR FARM PRODUCTS exported,” says Dennis Heinecke, AGCO’s vice president of sales operations. “The weak dollar provided a huge discount on the demand world- wide for used equipment.We need to keep an eye on financial markets to make sure that there are funds for foreign buyers to continue to purchase dealers’ used inventory. It’s amazing to see what’s getting exported — it’s cleaned the lots out.The key is when we see the lots start filling up again. That’s something we’ll be watching.” For How Long? “We don’t see any reason for a retreat of the 50% gain [in sales] we’ve experienced over the last 2 years,”says Walker.“We expect a Fig. 2. Using Deere & Co. as a benchmark, this chart shows how the stock rises and falls with the stable and sound level of industry pur- PPI for farm products. “We don’t think the PPI has peaked, as there has not been the prolonged chases, with a good demand for equip- pricing power needed to replenish the aging agriculture fixed assets in this cycle,” says Bannister. ment manufacturers.” Despite volatile commodity costs falling rapidly.“Additionally,plant- tum through the first half of 2010. In a prices, Case IH doesn’t see them ing in key crops in Brazil has been report to investors, Bannister bases his falling below profitable levels. lower than expected, making next analysis on historic trends for the “Overall, we see a stable, sound mar- spring a critical year for U.S. farm risk Producer Price Index, which he says ketplace with predictable net farm management, likely putting downward has not yet peaked, as well as the aver- incomes,”Walker says. pressure on equipment purchases.” age age of the American farm fleet, Heinecke expects a similar sce- Strong Sales to 2010. which he says is “old.” nario.“The professional producer side Uncertainties aside, Barry Bannister, Figures 1 through 4 were devel- still looks very positive from a stand- analyst for Stifel Nicolaus, sees farm oped by Bannister to support his analy- point of commodity prices. With the equipment sales maintaining momen- sis of the ag equipment market. population trends and the diets changing, food FARMER’S PRICING POWER AVERAGE AGE OF AG demand is the key to DRIVES FARM MACHINERY EQUIPMENT VS. 2WD (100+HP) agriculture.” Ann Duignan, analyst FLEET AGE TRACTOR SALES for JP Morgan also told investors,that despite continuing strong fundamen- tals, she sees 2009 likely peaking given the current global environment. “Using our propri- etary pricing model, total industry revenues are up 16% year-to-date. However, we may be seeing the beginning of the peak of the equipment cycle, as cash receipts from major crops are now expected to be up only Fig. 3. This chart depicts the replacement cycle of ag Fig. 4. U.S. unit sales of high-horsepower tractors rise slightly in 2009 — 4% — machinery. Historically, it has taken prolonged pricing and fall as part of a fleet replacement cycle that renders power, or lack thereof, to replenish or deplete capital the fleet alternately “old” and “young” again, as demon- and input costs, while goods engaged in the production of natural resources. strated since 1970. “Although total unit sales of large falling,remain elevated.” This chart show the U.S. tractor fleet age (on an invert- U.S. farm tractors may not return to the 1970s level, She adds that the ed scale) moving in tandem with the PPI for ag products even after the recent increase in large tractor sales, fleet dynamics are changing for the past 8 decades, highlighting 3 cycles of farm ages are still ‘old,’ as shown in the chart,” says Bannister. daily with corn prices fleet replenishment (1920, 1950 and 1980). Another “This example is illustrative since global sales of larger such cycle should emerge, continuing from last year farm equipment are supported by farm consolidation and trading with oil and input until 2010, according to Bannister. demand for technologies that improve crop production.”

8 Ag Equipment Intelligence/December/2008