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Farm Equipment Sector Risk Rises as Cycle Nears Negative Inflection Point

Sunday, September 01, 2013

Farm cycles generally start with a surge in demand from exports; this leads to higher commodity prices, a capital spending cycle (e.g., machinery, land, and buildings) occasionally financed with debt, and a production and supply response. As demand wanes or fails to keep up with supply, prices rationalize, farmer profits erode, and the capital spending cycle rolls over.

In a recent report on the farm equipment sector, GII analyst Larry De Maria explains his belief that the peak in the agriculture cycle likely occurred in the first half of this year and thus the cycle will have a more pronounced downshift starting next year.

“There are numerous developing headwinds that suggest relatively sharp downside,” according to De Maria. “Farmers will begin to shift to doing more with less (lower costs and productivity) as a result of slimmer margins and a mature capital spending cycle.”

He believes there is a potential asset bubble in farmland that could cause the boom cycle to eventually contract more sharply than expected. U.S. farmland prices have surged this past decade. De Maria’s correlation analysis suggests that there are reasons to be concerned about downside to farmland prices in coming years.  Therefore, caution on the sector is warranted, in his opinion.

While this report focuses mainly on North America, larger markets such as Brazil and Europe could also weaken.

For more information or a copy of the report, please contact your William Blair representative.

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