Vol. 13, Issue 3

News, Information & Analysis for the Ag Equipment Marketer July 15, 2006 Is AGCO Streamlining Its Multi-Brand Strategy? Industry Web site message boards are and Challenger. mission in it.We could also see at this rife with speculation these days that “There were many questions time a new addition to the AGCO DT AGCO, Duluth, Ga., will soon be about the Hesston and Gleaner line in the 300-PTO hp range. Not sure announcing plans to streamline its ag brands.We were assured the products if we will see it in August or not, but it equipment product lines and settle on would not disappear, but those assur- is coming.Then in 2007, the 3 cornerstone brands: Massey- ances were not made about the get a new cab, with an optional Ferguson,AGCO and Challenger. brands themselves. Questions were reverse station, like offers now.” Some industry observers have raised about color schemes of equip- One writer believes this is a bold taken to calling these the “ROY” ment, but those were not answered move on the part of AGCO, but poses brands – red, orange and yellow — either. In the middle of August in several questions about the details of and say this is a move in the right St.Louis (during the AGCO dealers’ the strategy. direction for AGCO, which now man- meeting) there is going to be a large “Yes, after the fashion of big ufactures and markets a plethora of new product introduction. I presume green, Bob Ratlif’s (retired AGCO CEO) tractors and farm equipment of nearly many of the dealer questions will be original plan has run its course. All every make and color. answered then.” new equipment will be upgraded — One dealer writes,“At the dealer Another dealer writes,“Expect to New Idea, Hesston, or whatever — and interface meeting in Las Vegas, the top see a class VIII combine from both all models will sport leadership announced that for the Massey and Gleaner, plus the intro- red, AGCO orange or Challenger yel- North American market, they were duction of an all-new 4-wheel drive low. Now, every owner of a red, yel- moving towards 3 “cornerstone” , (not the Challenger 900 low or orange powerplant will have a brands — Massey Ferguson, AGCO series). It may even have a CVT trans- matching name and color hooked Continued on page 2

Gehl Feeling the Effects of Dropping Ag Products After announcing in April that it was relationships.” least 18 months,”says McCarthy. dropping production of its line of ag While many of Gehl’s ag equip- Gehl believes the $6.5 million implements, Gehl Co.’s transition to ment dealers say they felt the deci- expansion of its Yankton,S.D., facility, building and marketing strictly com- sion to abandon farm products was which will increase its telehandler pact construction equipment may not coming, the timing of the announce- capacity by 50%, will ease its capacity be going quite as smoothly as it hoped. ment didn’t leave them time to order constraints. This, according to Baird analyst Robert McCarthy, other equipment to meet customer McCarthy, could facilitate market while indicating that he remains requirements. (See Ag Industry share gains and support 2007 revenue “incrementally positive” on the 2007 Watch, May 2005, “Decision to Drop growth even if industry sales growth prospects for the West Bend,Wis. firm, Implements Leaves Gehl’s Ag Dealers were to become more sluggish. trimmed his price target on Gehl in a Quandary.”) The company also plans to bring stocks to $32 from $37 per share. Gehl estimates that it has some of its out-sourced manufactur- Among the issues confronting Gehl achieved only 60% of its desired dealer ing in-house during the next 3-5 years is its lack of a complete distribution net- network coverage and has not added as well as becoming more active in work as well as the high costs of mate- any new dealers recently because of sourcing initiatives. rials and third-party manufacturing. capacity constraints in the manufac- The company also notes that it McCarthy notes that Gehl’s “with- ture of its telehandler products. may potentially bring other manufac- drawal from farm machinery equip- “Despite significant increases in turing in-house that is currently ment product ranges could potentially production volumes, Gehl has not sourced from third parties to further adversely impact distribution network added a new telehandler dealer in at reduce costs.

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. Continued from page 1 behind them, just like Deere. “The question is what will hap- AGCO TO BUILD NEW EUROPEAN pen to total sales since now almost HYBRID COMBINES IN DENMARK ‘NO’ Deere, CIH, NH and shortline AGCO announced on June 20 that it plans to manufacture a new series of independent dealers will be able to European hybrid combines at an existing site in Randers, Denmark. AGCO says it sell the lines of equipment as cross would begin to deliver the new, self-propelled combines in time for the 2008 harvest. branding goes into history.This is The company also indicated that its 2006 output of 8 styles of walker combines meant to strengthen the AGCO ‘ROY’ produced at Randers would be 40% more when compared to what was produced at dealers. Another question is will the the plant in 2005. AGCO disclosed last July plans to outsource low- and medium-duty Fendt Deere guy who pulled a rust-bucket- branded harvester production to its Italian farm machinery competitor, the Argo red Hesston or red New Idea mower group. Production was shifted from AGCO's Randers site in Denmark where it now pull an AGCO orange or MF red reduced the number of employees by 300 to fewer than 100. AGCO earmarked its baler, planter or manure spreader?” Randers site for the assembly of high-end farm equipment. Another dealer indicates he’s In addition to Randers, Denmark, AGCO also manufactures combines in North behind the move all the way. “AGCO is America and South America and Breganze, Italy. strengthening its dealers with the 3 cornerstone brands. AGCO. We’ll also be seeing more new dous amount of customer attention “They want dedicated full-line products in St Louis in August. with recent introductions especially dealers.We are 100% behind this.There “We are excited about the future the PowerMAXX CVT the only true are going to be changes and not every- possibilities and more innovative CVT in the market. I see increased one likes changes, but we feel it is in products that AGCO will bring to the sales and new opportunities and a the best interest and future growth of market. AGCO has created a tremen- stronger dealer network.”

Mahindra’s Attempt to Acquire Romanian Tractor Maker Stalls Indian tractor maker Mahindra & Selling off Tractorul, which pro- A condition of M&M’s bid was that Mahindra (M&M) says it remains inter- duces tractors under the UTB/Universal the Romanian government should ested in acquiring Romanian firm names, has proved a tough challenge writeoff Tractorul's accumulated liabil- Tractorul Brasov and is open to offers for the AVAS agency charged with trans- ities,which amount to the equivalent of of terms from the government’s state ferring state assets to the private sector. more than $198 million. But with no assets agency. A prospective takeover by guarantees that this state aid would not However, talks are off for the Landini, part of the ARGO Group, subsequently be challenged,M&M was moment.The agency could not guar- reached an advanced stage before unable to agree to terms ahead of the antee that the state debt write-offs questions over debt write-off caused legal deadline for negotiations. included in M&M’s bid for the the Italians to withdraw. The attraction of the state-owned Romanian tractor business would not M&M was then chosen ahead of a operation is that it would give be challenged by either the country’s Romanian cooperative as the preferred Mahindra a low-cost production site in own competitions authority or the bidder, but talks over the past 12 Eastern Europe from which it could European Union. months have again proved fruitless. launch an initiative into surrounding markets,as well as into Western Europe. Rival Indian firm Escorts has Site Sale Only for ARGO Group already established a bridgehead just over a year ago with the outright pur- The ARGO Group, has not sold the McCormick factory; the production chase of its Farmtrac Tractors Europe resources and all related assets remain in ARGO's ownership. It has sold only joint venture, which was acquired the site on which the plant is located — an important distinction. through U.S.-based subsidiary,Escorts ARGO has entered into a long-term lease agreement for the site and Agri Machinery,Inc. views this arrangement as a cost-effective means of realizing the value of this At the time,Escorts said it planned asset.The agreement has raised approximately $28 million.Although some of to actively seek a larger market share that will be used to pay off a bank loan, a large proportion of the revenue will for Farmtrac tractors in European coun- be invested in developments that will further strengthen the McCormick tries, while also targeting African,Asian product line. and Latin American markets.

AG INDUSTRY WATCH is published monthly for the farm equip- U.S., Canada and Mexico print subscriptions are $349 per ment industry by Lessiter Publications Inc., P.O. Box 624, year. Save $50 by receiving Ag Industry Watch each month via Brookfield, WI 53008-0624. © 2006 by Lessiter Publications Inc. E-mail Internet access at only $299 per year. International print All rights reserved. Reproduction in any form of this newsletter subscriptions are $449 per year. Send subscriptions to: Ag content is strictly forbidden without the prior written consent of the Industry Watch, P.O. Box 624, Brookfield, WI 53008-0624. Fax: publisher. Please send any address changes as soon as possible 262/782-1252. Phone: 262/782-4480 or 800/645-8455 (U.S. only). to the address shown above. E-mail: [email protected].

2 Ag Industry Watch/July/2006 With Bigger Stake in Deutz, SDF Triggers Speculation of a Takeover Same Deutz-Fahr (SDF) may have share purchase offer document — ent, Ranipet makes around 3,000 increased its stake in Deutz to almost that there is no intention of taking engines in the 30- to 50-hp range, 40%, but it has no intention of launch- control of Deutz. mainly for the local market. In the ing a takeover bid for the German “We view this statement as an future, the plant will make a wider diesel engine maker, insists CEO, unambiguous commitment to the suc- range of engines and production will Massimo Bordi. cessful partnership between our com- increase to 20,000 units annually.” “We have no wish to buy Deutz panies.The independence of Deutz AG Increased sales to SDF of 4-litre outright.Our strategic partnership with as a listed German company is an and 7-litre agricultural engines should the company is very important to us, indispensable condition for achieving provide a further boost to the recov- but the future success of Deutz is our commercial objectives,” he said. ering financial performance at Deutz dependent on it remaining an inde- “The confidence of our customers in a where 2005 results saw a 12% pendent business,” he says.“However, Deutz that is not under the influence increase in sales revenues to the in view of our increasing reliance on of competitors is of critical impor- equivalent of $1.69 billion, a similar Deutz as an engine supplier and the tance to the maintenance and devel- increase in the value of orders and a interest being shown by independent opment of our strategic supplier rela- 16.8% increase in operating profit to equity houses in the Deutz business, tions and thus for our market success.” $79.8 million. we felt it necessary to protect our inter- SDF is already the company’s After one-off items, including ests by acquiring a larger shareholding.” biggest customer in the agricultural $85.6 million from the sale of the Speculation regarding SDF’s inten- sector. Deutz also supplies engines to marine service business, EBIT amount- tions intensified when the conversion AGCO for Fendt tractors and com- ed to $146.5 million, compared with of profit-sharing rights and bonds to bines along with a number of $23.6 million in 2004, and net income Deutz shares lifted the Italian tractor wheeled loader and telescopic han- rose to $91.2 million. maker’s stake by almost 10%.This trig- dler manufacturers. It is set to become “In the annual financial state- gered a mandatory offer to sharehold- an even more important client as SDF ments prepared in accordance with ers under German stock market rules. plans to phase out European produc- German accounting standards, the Construction equipment maker tion of its own engines. company reported net income of Volvo, which has an engine partner- Last year,just over a quarter of the $70.7 million for 2005, following a net ship with Deutz and owns 50% of the SAME, Lamborghini, Hurlimann and loss of $11.2 million in 2004,”report- intellectual property rights of key Deutz-Fahr tractors produced by SDF ed CEO Gordon Riske.“The accumu- engine designs, is the next-biggest were powered by Deutz. By the end of lated loss was thus reduced to $27.6 individual stockholder with 5.7% of 2007, that will increase to 100% with million, taking us a substantial step shares. U.S. mutual funds company respect to tractors produced for “emis- closer towards the resumption of div- FMR Corp. (Fidelity Investments) sions-compliant”markets. idend payments.” holds 5.1% of Deutz voting rights, hav- “Engine production at our Deutz shares put on 41% through ing bought a chunk of the 55.4% of Treviglio headquarters in Italy will 2005 and market capitalization was shares traded on German stock cease, but the current designs will up 47% to $502 million by the end of exchanges. continue to be assembled in our the year. The share price, which At its annual shareholders meet- Ranipet plant in India for markets that moved from a 52-week low of $4.49 ing recently,Deutz CEO Gordon Riske do not require the same level of emis- to a high of $10.86, has settled around reiterated what SDF made clear in its sions compliance,”says Bordi.“At pres- the $8.05 mark.

FARM MACHINERY TICKER (AS OF 7/11/2006) 7/11/06 6/12/06 1-Year 1-Year P/E Avg. Market Mfr. Symbol Price Price High Low Ratio Volume Cap.

AGCO AG $26.93 $21.43 $28.69 $14.60 86.87 2.06 M 2.44 B Alamo ALG $23.90 $21.00 $24.85 $18.04 22.13 27,700 233.05 M Art’s Way ARTW $6.66 $6.20 $9.19 $4.50 14.17 14,200 13.14 M Caterpillar CAT $73.40 $66.32 $82.03 $48.25 16.57 5.05 M 48.88 B CNH CNH $22.73 $21.20 $30.50 $15.79 27.72 167,900 5.35 B Deere DE $82.26 $77.30 $91.98 $56.99 14.38 2.31 M 19.35 B Gehl GEHL $27.31 $22.24 $40.73 $20.58 13.59 182,800 328.87 M Kubota KUB $46.60 $42.50 $60.60 $27.75 11.48 42,700 12.11 B

Ag Industry Watch/July/2006 3 Titan Acquires Italy’s ITM Group, Expanding Its Reach into Europe and Australia Titan Europe, the U.K.-headquartered tomers, suppliers and our staff,” he employed in Italy and half in the U.K., manufacturer of off-highway wheel comments.“We remain confident that France,Australia and Germany. rims, has diversified its product line the benefits and synergies identified The enlarged group produces with the acquisition of the Italian ITM during the acquisition process can rims and supplies complete rim and Group, which makes components for be realized.” tire assemblies, off-highway vehicle undercarriages of tracked agricultural ITM Group, now operating under brakes and the newly acquired range and construction vehicles. the Titan Europe name and compris- of track assemblies and components. Chief executive Mike Akers says ing NewCo SpA and Italtractor ITM They are used for agricultural vehi- the deal has created a global specialist SpA based near Bologna, is being fully cles, which represent about 20% of manufacturer of both track compo- integrated with existing operations. group sales revenues, and mining and nents and wheel rims, serving a cus- Ivano Passini, who took over manage- construction machines (70%). tomer base that includes leading off- ment of the ITM Group in 1992 and “Trading during the first quarter highway vehicle producers such as became its sole shareholder, has of 2006 was in line with our expecta- AGCO, Caterpillar, CNH Global, Deere, joined Titan Europe as a Director. tions, with sales to the mining and Komatsu, Landini, Liebherr, Renault Two-thirds of the acquired opera- construction sectors showing a strong Agriculture, Same Deutz-Fahr and tion’s 1,500-person workforce is start to the year,”reports Akers.“Sales Volvo Construction. employed in Italy; the rest in Germany, to the agricultural sector began the “The integration of ITM is pro- Spain, Brazil, China and the U.S. Prior year more slowly with lower initial ceeding well and we’ve had positive to the acquisition, Titan Europe had volumes than expected, but have reactions to the acquisition from cus- 1,300 employees, half of which are since showed signs of recovery.”

Territory Assignment Ruling Could Have Implications for Ag Dealers A recent ruling by the Wisconsin State Racine dealership filed a complaint dealership. The Burlington area pro- Supreme Court may cause equipment with the state Division of Hearings duced the second-highest sales in the makers to think twice before arbitrarily and Appeals contending that the ter- Racine dealership’s territory in 2001. reassigning the territories of their dealers. ritory change was a modification of The Supreme Court’s reversal of In a case that pitted Harley- its dealer agreement and would the District Court’s ruling gives the Davidson Motor Co. against its Racine, decrease its market potential. Wisconsin Division of Hearings and Wis.,dealership,the court ruled that ter- The division ruled that altering a Appeals a new basis to reconsider ritory assignments are an essential part territory did not represent a change its decision. of motor vehicle dealer agreements. to the dealer agreement. This was Territory assignments are an In a unanimous ruling, the court reversed by a Racine County circuit “absolute cornerstone” of franchise reversed a 2nd District Court of judge, who said territory definitions agreements, says Gary Williams, presi- Appeals decision that said Harley did were part of the agreement. dent of the Wisconsin Automobile and nothing wrong when it moved a ZIP Harley changed the territories Truck Assn., who has been watching code out of Racine Harley-Davidson, after Uke’s moved its dealership along the case closely. Inc.’s territory and assigned it to I-94.The company figured that Uke’s “The whole financial model of neighboring Uke’s Harley-Davidson of was closer to Burlington, another dealerships is based on territories,” Kenosha, in southeast Wisconsin.The nearby town, than was the Racine says Williams.

Farm Equipment Industry Notes & Newsmakers FAE USA, manufacturer of vegetation control, rock crush- Deere & Co. Moline, Ill., announced on June 19 that it ing and soil stabilization attachments, broke ground for has acquired Roberts Irrigation Products, Inc., a maker of its new headquarters, production and distribution center micro and drip irrigation products. Roberts Irrigation will in Oakwood, Ga. on July 10. continue to be headquartered in San Marcos, Calif., and AGCO Corp., Duluth, Ga. appointed Andre Carioba as John Roberts will remain as president of the firm. senior vice president and general manager for South America. Degelman Industries, Regina, Saskatchewan, has Carioba is responsible for managing all operational functions entered into a joint-venture marketing agreement to as well as development and implementation of specific brand become the worldwide distributors for product lines that marketing strategies for AGCO Allis, Challenger, Massey are manufactured by Bridgeview Manufacturing, Inc. of Ferguson,Valtra and AGCO application equipment.He will be Canada, a firm based in Gerald, Saskatchewan. The line an officer of AGCO, headquartered in Sao Paulo, Brazil. includes Bale King bale processors and Bale King high- Carioba came to AGCO from BMW Brazil,Ltd. capacity wheel rakes.

4 Ag Industry Watch/July/2006 Trends in Spraying Equipment Merits Attention In addition to the growing concerns tor, there will typically be a $3 per in downtime at a critical time in the about Asian soybean rust and the acre savings with an owned sprayer growing season. A hydrostatic unit, need for timely application, trends in compared to paying $5.25 to $6 per with all of its electrical and hydraulic the sales and use of spraying equip- acre for custom application. lines needed to operate the drive sys- ment are shifting toward individual The company also points out that tem must be worked on by a dealer growers and away from custom appli- when a farmer calculates the costs for technician rather than the farmer cators.This and other economic and doing his own spraying, the grower being able to do it himself in his shop. operational issues are beginning to should be using the following figures: Yet, the mechanical drives on equip- reshape sprayer use for agricultural • Operator labor at $15 per hour. ment like the Apache sprayers is much applications. • Fuel cost of $2.90 per gallon. like the tractor that the farmer is used During the Equipment Technologies Another significant trend that the to working on in his shop. dealer meeting in June, one Nebraska dealers see developing is the use of Hydrostatic sprayers don’t hold dealer noted that in 1996,85% of sprayer direct-gear drive units vs. hydrostattic their value as well as those with sales went to custom applicators.Today, drives for both fuel savings and ease mechanical drives. The staff at he reports,this has flip-flopped and 85% of maintenance. Equipment Technologies has calculat- of sales now go directly to farmers. Equipment Technologies has ed that the loss in value on the pur- The reason for the shift, he says, is found that with direct-gear drive chase of a new,self-propelled sprayer due to the ease of application of sprayers, users can experience is 12% during the first year and equals Roundup and the change in custom between 30-40% fuel savings when 3 to 4% for each of the following application costs from only $3 to as compared with hydrostatic drives. years. So a self-propelled sprayer, after much as $6 per acre. Plus, for timing Over a 5-year period, this can result 5 years of use ,would likely have lost purposes, more farmers want to do in as much as $26,000 in fuel costs 24% to 28 % of its value. their own spraying. More farmers are for a typical custom applicator. They point out that the first also realizing that fungicides on soy- Most self-propelled sprayers on the sprayer that Apache built 9 years ago beans will pay even without rust. market are hydrostat units, but the had an original list price of $60,000. When a crop needs to be sprayed Raptor line that Miller purchased Nine years and several owners later, it for insects or diseases, growers recog- recently (see box below) is also a sold for $45,000 earlier this year. nize that it needs to be sprayed quick- mechanical drive. A couple of other Richard Payne of Agri-Mart, ly for the best economic return with small manufacturers make mechanical Owensboro, Ky., says that there is a any pest, and the needed chemical drive sprayers, but there appears to be growing demand for used self-propelled prescription can change by tomor- some interest among other sprayer Apache sprayers.“We can’t get enough row. Farmers don’t want to put it off manufacturers in possibly offering such used Apache sprayers to meet the by having to wait for a custom appli- an option due to the ease of mainte- demand,” he says.“A used Apache cator. nance with farmers. sprayer seldom stays on our lot for more According to the staff at Dave Odenweller of Waitt than 2 weeks.But remember that a used Equipment Technologies, when a Companies, Ottawa, Ohio, says hydro- sprayer is only as good as the dealer that grower considers doing his own stat units can be time consuming and stands behind it.” spraying vs. hiring a custom applica- expensive to repair, which can result Kverneland Group MILLER ACQUIRES RAPTOR SPRAYER LINE Losses Down in ‘05 Miller-St. Nazianz, Inc., St. Nazianz, Wis., announced on June 13 that it acquired the Raptor self-propelled sprayer line from Weddle Equipment, Martinsville, Ind., Ag equipment maker, Kverneland and will add the brand to its application equipment manufacturing business. Ken Group produced a net loss of $9.84 Weddle, the developer of the Raptor will join Miller’s application products team. million at current exchange rates Prior to the acquisition, Miller Application Technologies (MAT), which is Miller's in 2005, down from a loss of application operation, included NITRO high-clearance sprayers, the Miller Mertz $11.24 million in the year prior, on CenterRide chassis and Silver Wheels floater trucks. In late 2004, Miller also equipment sales at about the same acquired Ag-Bag, a major manufacturer of silage bagging equipment. “Adding the Raptor line to an already extensive product mix provides Miller level as 2004. Operating revenues dealers and customers greater choice of products as it complements Miller's front were $634.29 million, down from boom, hydraulic 4wd, 72-inch clearance NITRO line,” says Rich Basarich, Miller's $642.3 million. vice president of marketing and sales. “Raptor fits markets where there's a prefer- The company says that ongo- ence for a rear mounted boom, 48" clearance and a 2-wheel mechanical drive self- ing re-organization at Kverneland’s propelled row crop machine,” Basarich said. production facilities will yield sav- Miller's application products also include crop trailer sprayers, 3-point hitch sprayers, and pickup truck sprayers. The company has been an agricultural suppli- ings that should help improve er since 1899 when the present owner's great grandfather first opened his hardware group profitability this year. Closure business in St. Nazianz, Wis. One hundred and seven years later, Miller-St. Nazianz, of the company’s hay and silage Inc. continues to grow from its original location in the fertile farmland area of east implement factory in Germany is central Wisconsin. expected to save $12.8 million annually in the next year.

Ag Industry Watch/July/2006 5 Danish Equipment Maker, Kongskilde, Back on Sound Footing Managers at the Danish farm and indus- and handling equipment, industrial production plants for agricultural trial equipment group, Kongskilde conveying systems and space heaters. machinery in Europe. Industries, have become shareholders Although the activities of the Soil In , the Overum plow fac- as part of a $4.3 million rights issue division remain dominant, accounting tory has successfully been reorgan- intended to support and intensify the for 67% of sales (down from 71% in ized to improve production efficien- development of the business. At the 2001), Kongskilde wants to see a cy.Sales of agricultural implements in same time, the subordinated loan capi- more balanced portfolio with less Germany have been put in the hands tal was increased by the equivalent of reliance on volatile markets for field of an independent distributor after $8.4 million to $12.9 million. equipment. Kongskilde closed its losing sales The moves have increased the Europe remains the group’s company. total subordinated capital of main market with 77% of sales, but Fixed costs have been reduced by Kongskilde from $17 million at the Kongskilde has a strong presence in more than $13 million and the oper- end of last year to $29 million. North America, where it makes grain ating result improved from minus $14 “Since the group’s financial handling systems, accounting for million in 2003 to a positive $8.4 mil- reconstruction in September 2003, 16% of sales revenues, but 25% of lion last year. Kongskilde management has intensi- group operating profit. “In the first 5 months of this year, fied efforts to optimize the group and Restructuring to reduce costs and the development in Kongskilde has secure a profitable operation,” says return the group to profitability are been sound, especially within the Asbjorn Borsting, chairman of the the main objectives at present, accord- grain and industry divisions,” adds board of directors. ing to Anette Ilsoe, CEO. Kongskilde’s Borsting.“The group has improved its Kongskilde operates two divi- production site in Poland is now func- order intake by 20% and is expected sions.The Soil division produces cul- tioning well, she reports, and is today to achieve an operating profit again tivators, seed drills, fertilizer spread- considered one of the most modern this year.” ers and sugar beet harvesters. The Systems division covers grain drying EQUIPMENT SALES KONGSKILDE MARKETS Beet Rest of KONGSKILDE (harvesters) Heaters Africa the World 2% 1% INDUSTRIES – Grain 4% 3% (driers, KEY FIGURES handling) North ($ millions at current 12% America exchange rates) Industry 16% (conveying) Soil 2003 2004 2005 18% (cultivators, Net sales 125 125 109 drills) Europe 67% Profit before (8.5) 5.48 8.37 77% depreciation Net profit (25.7) (3.38) (3.88) Operating profit (14) 1.54 8.4

Straub Int’l Acquires Kverneland Replaces Norcan Caldwell Equipment The Kverneland Group, Drummondville, Québec, announced on June 14 that it has assumed the responsi- Straub International, Inc. announced on June 15 that it bilities for distributing and servicing all KG-branded prod- had acquired the dealership assets of Caldwell ucts for both farmers and dealers in the northeastern U.S. Equipment Company,Inc. of Wichita, Kan. from Norcan. This acquisition will make Wichita the sixth market in Norcan, headquartered in East Syracuse, N.Y., had Kansas in which Straub International is located.The others been an importer of Kverneland Group products for over are Great Bend,Salina,Hutchinson,Marion and Larned. 42 years. The combined complex of stores will have over 110 Kverneland manufactures and markets agricultural employees that cover a territory that comprises 25% of equipment for grass, soil preparation, fertilizing, seeding, the counties in Kansas and 2 counties in Oklahoma.The spraying and vineyard mechanization. company is one of the largest Case IH dealerships in the Kverneland Group North America will continue to Midwest. It also handles New Holland, Great Plains and work from its headquarters in Canada and will support its Polaris brands.Additionally, Straub will supply the large Canadian dealer network from this location.The U.S sales Case IH SPX series of self-propelled sprayers, as its com- office will be in Syracuse, N.Y., and will support its Taarup plex is only one of 4 Case IH dealers in Kansas author- and Kverneland/Accord dealer network primarily in the ized as a grower-sprayer center. Northeast U.S area.

6 Ag Industry Watch/July/2006 Row-Crop Tractor JUNE U.S. UNIT RETAIL SALES May Percent YTD YTD Percent Equipment June 2006 June 2005 2006 Field Sales Fell 25% Change 2006 2005 Change Inventory in June Farm Wheel U.S. sales of row-crop tractors (100 Tractors-2WD hp and over) fell by 25% in June Under 40 HP 14,058 16,372 –14.0 67,800 68,483 –1.0 69,078 compared with June 2005, accord- ing to figures released by the Assn. 40-100 HP 8,425 8,522 –1.1 39,228 38,047 +3.1 34,994 of Equipment Manufacturers. Total tractor sales during the month — 100 HP Plus 1,187 1,582 –25.0 9,512 10,951 –13.1 5,719 23,895 units — also dropped by 23,670 26,476 –10.6 116,540 117,481 –0.8 109,791 10.7% through the first 6 months of Total-2WD the year compared with the same Total-4WD 225 279 –19.4 1,648 1,961 –16.0 863 period in ’05 when 26,755 units were sold. Total Tractors 23,895 26,755 –10.7 118,188119,442 –1.0 110,654 According to the AEM,June 2006 U.S. agricultural machinery sales, by SP Combines 635 640 –0.8 2,477 2,417 +2.5 1,707 class, were as follows: • Utility tractors — Sales declined 1.1% in June, following a 3.8% JUNE CANADIAN UNIT RETAIL SALES increase in June of the prior year. May • Row crop tractors — Sales Percent YTD YTD Percent Equipment June 2006 June 2005 2006 Field Change 2006 2005 Change declined 25% in June, following a Inventory 10.7% decline in June of the prior year. Based upon UBS Investment Farm Wheel Research calculations, the 1,187 Tractors-2WD row-crop tractors sold in June Under 40 HP 1,388 1,244 +11.6 4,983 4,147 +20.2 5,567 translate to a seasonally adjusted annual rate of roughly 16,310 40-100 HP 732 729 +0.4 3,376 3,161 +6.8 3,146 units, based on monthly sales trends from the 1985-2002 period. 100 HP Plus 342 394 –13.2 1,968 1,877 +4.8 1,569 In the prior 12 months, row-crop tractor sales were roughly 18,500 Total-2WD 2,462 2,367 +4.0 10,327 9,185 +12.4 10,354 units. Total-4WD 59 29 +82.8 386 375 +2.9 193 • Four-wheel drive tractors — Sales declined 19.4% in June, fol- Total Tractors 2,515 2,396 +5.0 10,713 9,560 +12.1 10,547 lowing a 3.8% decline in June of the prior year. SP Combines 156 157 –0.6 514 508 +1.2 662 • Combines — Sales declined 0.8% in June, following a 4.7% increase 2006 in June 2005. U.S. UNIT RETAIL SALES OF 5 year According to David Bleustein, 2-4 WHEEL DRIVE TRACTORS & COMBINES average analyst for UBS, the June results 30,000 increase the odds of lower farm equipment company earnings. “For 28,000 2006, supported by the recent soft- 26,000 ness in domestic farm machinery 24,000 sales, we expect flat-to-slightly-lower sales of agricultural equipment in the 22,000 U.S., although we also see some evi- 20,000 dence of a somewhat stronger than 18,000 expected European market with 16,000 AGCO being a major beneficiary. “Although we believe the fore- 14,000 casts for farm equipment demand are 12,000 relatively conservative, we also 10,000 believe a continuation of the weak- ness evident in the June row-crop 8,000 tractor sales could cause weaker than 6,000 expected results in 2006, notably for JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC CNH and Deere,”says Bleustein. —Assn.of Equipment Manufacturers Ag Industry Watch/July/2006 7 Price of Iron Castings for Ag Equipment Expected to Increase Significantly The price of iron castings used in castings for agricultural applications farm equipment is projected to are forecast to increase by some 13%. SPRAYER COSTS RISING increase as much as $40 a ton during According to the Stratecasts One major manufacturer of agricultur- ‘06 despite a developing “oversupply” report,“Demand and Supply Forecast al sprayers is reporting that it will be situation, according to Stratecasts, for Metal Castings in the United increasing the price of its sprayers for Inc., a marketing and consulting firm States,”casting shipments are expect- 2007 from between 3.5% for its 700- based in Ft. Myers, Fla. ed to decline despite the rising price gallon units to 7% for its 1,200-gallon equipment. The price of ductile iron parts used of castings produced for the farm The company attributes the in ag machinery is forecast to jump machinery market.The downswing in increases to higher costs, especially from an average of $1,880 a ton in 2005 the volume of casting shipments to for steel and rubber tires, as well as to $1,920 per ton during ‘06.Increases ag markets is running counter to higher engine costs, which includes for cast gray iron parts are projected to many other casting markets. a new cooling package and a step up rise more slowly from $1,190 per ton On the whole, shipments of iron in engine horsepower for their line of sprayers. last year to $1,210 in 2006. castings are expected to rise during The weak U.S. dollar is also The difference in the price the next 2 years. However, the volume contributing to the higher sprayer increase is due to the pressure on sin- of cast parts for the ag industry is costs as well, because the firm gle-customer gray iron metalcasting expected to trend downward during imports its transmissions from facilities to lower casting costs, as well this period. England. as the fact that the price of ballast While shipments of ductile iron weights tends to remain static, accord- components for farm machinery are mand a significantly higher value in ing to Stratecasts. forecast to remain on a steady growth the market than does gray iron. Much In the longer term, cast ductile pattern, gray iron shipments are of the increase in pricing of iron com- iron parts for farm equipment are expected to decline by nearly 15% ponents for ag equipment markets expected to rise by more than $250 a during the next decade. Because of its will be the result of growing use of ton, or nearly 14%, between 2006 and improved mechanical and physical ductile, which is expected to grow by 2015. Over the same period, gray iron properties, ductile iron parts com- nearly 11% in volume by 2015.

FORECAST OF PRICE PER TON FOR IRON CASTINGS FOR AGRICULTURAL APPLICATIONS — 2006-15 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Gray Iron Castings $1,190 $1,210 $1,230 $41,260 $1,280 $1,300 $1,320 $1,340 $1,350 $1,370 Ductile Iron Castings $1,880 $1,920 $1,950 $2,000 $2,030 $2,070 $2,100 $2,130 $2,150 $2,180

WSJ Article Retraces Deere’s Path to Profitability Like all cyclical industries, farm equip- there were only spurts where Deere inventory have been reduced. When ment makers have struggled over the earned its cost of capital. As soon as the plant is busiest in the summer as years to smooth out the hills and val- he took over 6 years ago, Lane began farmers order equipment, production leys of the U.S. economy. Despite its reconstructing the company’s manu- ramps up and then closes in reputation as ag’s 800-pound gorilla, facturing and sales to reduce their vul- September and October. It then starts John Deere, too, has been challenged nerability to economic cycles. up again slowly, building fewer com- to maintain long-term profitability. First, Deere, like its competitors, bines in the winter. Managers work A July 10 article in the Wall Street had the habit of running its manufac- closely with Deere operations world- Journal looks at how Deere is chang- turing at a steady rate, producing wide to ensure that the more than ing its operations and strategic view equipment for which it didn’t have 17,000 parts that go into each com- to survive in the worldwide economy. orders.This led to deep discounts sim- bine are delivered only as needed. “We were stuck in the Joseph ply to move the machinery. These and other efforts are pay- syndrome of about 7 years of good Six years ago Deere dealers in ing off for Deere. In 2005, the com- times followed by 7 years of bad,”says North America might have had as pany had net income of $1.4 billion, CEO Robert Lane, a 24-year Deere vet- many as 1,600 unsold combines on more than double what it earned in eran.“We always weathered the cycles their lots.Today,they have about 200. 2003, on 41% gain in sales. Return on and said we’re doing well enough, but Today, Deere’s East Moline equity reached almost 23%. Worker this isn’t good enough to survive in a Harvester plant is 30% smaller. By productivity has risen 19% since ’03 global environment.” reorganizing its manufacturing opera- and their wage incentives have Over the past 40 years, he says, tions, parts and finished product grown 17%.

8 Ag Industry Watch/July/2006