Opportunities Arising From Turbulence in US Agricultural Machinery Industry

In 2017, the global market for agricultural machinery showed a recovery for the first time after reaching its lowest point in 2016. Sales of the three largest companies in the industry (Deere, CNH, Agco) grew by 12% in the 2017 calendar year, compared to 2016 (see Figure 1). The outlook for 2018 is cautiously optimistic – overall, the market is expected to grow by between 0% and 5%.

The US import tariffs on steel and aluminium – of 25% and 10%, respectively – are a serious threat to this recovery. According to the Association of Equipment Manufacturers (AEM), steel makes up about 10% of equipment manufacturers’ direct costs. Now that most countries are exempted from the steel and aluminium import tariffs, the threat of rising steel prices for US manufacturers seems to be lower for the short term. These exemptions, however, are only temporary, and they depend on the outcome of further trade negotiations. Therefore, US agricultural machinery companies still potentially face a 2.5% increase in direct costs. In that case, prices of agricultural machinery will need to go up, putting pressure on sales growth, as US crop farmers face another year of depressed margins.

An even bigger threat for the market recovery of agricultural machinery are the retaliatory measures from the US’s trading partners. The import tariffs on US agricultural products lower prices of US agricultural commodities destined for export, which will negatively impact sales of agricultural machinery.

After several years of decline in the global market, the US agricultural machinery industry, in particular, runs the risk of receiving another blow. The US becomes a less attractive place for manufacturing agricultural machinery, due to the risk of a further depressed domestic market and the risk of a higher cost of steel. And the competitiveness of American agricultural machinery companies on the domestic and world market is also at risk. As a result, we can expect manufacturing assets in the US to decline in value, creating opportunities for companies that take a long-term approach to building or strengthening their position in the US.