Agricultural Equipment

Industry Assessment

Background

Agricultural equipment consists of farm field and farmstead machinery used for the production of crops and agricultural livestock. Major product lines include wheel and track-laying agricultural tractors, planting and fertilizing machinery, tillage equipment, fertilizer and chemical application equipment, harvesting machinery, haying and mowing machinery, milking machines and other farm dairy equipment, poultry equipment, barnyard equipment, sprayers and irrigation equipment, grain dryers and blowers, commercial turf and grounds care equipment, and parts for farm machinery.

Because of the rugged construction and long service life of many farm machines, replacement parts represent a significant industry segment. Tractor mowers and some irrigation equipment used as commercial turf and grounds care equipment are also included in this industry definition. The industry is classified as farm machinery under NAICS Code 333111.

Industry Overview and Global Competitiveness

Some 1,000 companies manufacture agricultural equipment in the United States, according to the U.S. Bureau of the Census, employing nearly 53,000 workers in 2006 (latest data available). U.S. manufacturers of agricultural equipment reported sales worth $19.8 billion in 2006, the last year for which complete data is available, according to the Census’ Annual Survey of Manufacturers.

Over the last 20 years, worldwide consolidation has concentrated manufacturing and sales of high-value added, self-propelled farm field equipment in three major U.S.-based firms and one smaller European competitor. These “full-line” manufacturers are Deere & Company, CNH Global, and AGCO. A German firm, Claas KG, is also major global manufacturer of farm field equipment, with strong positions in the U.S., European and other international markets. These firms lead the agricultural equipment industry around the world because of the high value and relatively long production runs of their premier product lines, as well as the extensive service that they provide to large-scale commercial farmers who buy this equipment.

Other leading categories of agricultural equipment include irrigation technology, commercial mowers, and farm dairy equipment. John Deere and the Toro Company are leading U.S. manufacturers of commercial turf, grounds care, and irrigation equipment. Other leading U.S. irrigation equipment manufacturers include Valmont Industries, the Lindsay Corporation, and the Rain Bird Corporation. Bou-Matic and BECO Dairy Automation are the principal U.S. manufacturers of automated milking parlors and related systems and equipment.

Farm income is the leading influence on sales of agricultural equipment, domestically and around the world. The revenue that farmers receive from selling the commodity crops they grow (especially corn, wheat, soybeans, and cotton) is the principal component of farm income. Beginning in 2000, commodity prices rose steadily from low levels, topping out at historic highs in the spring and summer of 2008, before dropping significantly by the end of the year (January 30, 2009 release of “Agricultural Prices” by the U.S. Department of Agriculture).

Though still well above their 2000 levels, sharply lower commodity prices will definitely have negative consequences for U.S. manufacturers and exporters of agricultural equipment in 2009 and beyond. The blow may be softened to the extent that many farmers in the United States and other developed countries are likely to have cash on hand and relatively low debt, after eight years of strong income growth. Domestic and international sales will also be affected adversely to the extent that many manufacturers will find it increasingly difficult to obtain working capital or offer supplier credit to their dealers and customers.

Global Competitiveness

The United States exported $9.8 billion of agricultural equipment in 2008. Most U.S. agricultural equipment is exported to other industrialized market economies, where agriculture is highly capital intensive, reliant on sophisticated technology and integrated into the global economy. In recent years, Canada, Mexico, the European Union, and developed economies in the Pacific Basin (especially Australia and Japan) have accounted for 70-75 percent of U.S. exports. Since 2003, Russia, Ukraine, and Kazakhstan have grown dramatically as markets, accounting for more than 12 percent of U.S. exports in 2008.

The United States is generally a net exporter of agricultural equipment. In 2008, total U.S. imports were worth $7.3 billion, resulting in a surplus of $2.5 billion. Since the 1990s, the United States has consistently exported 25 to 30 percent of its output of agricultural equipment. In 2006, exports rose to 34 percent of manufacturers’ shipments and may have gone even higher in 2007 and 2008.

While North America, the European Union and other OECD markets account for the majority of U.S. exports, most of these markets are fairly mature. For about five years, until the fall of 2008, dynamic market growth was most conspicuous in Russia, Ukraine, and Kazakhstan—countries that were engaged in long-term modernization of their large and historically under-capitalized agricultural economies. A number of new member states of the European Union also offered strong, long-term growth potential, due to their growing access to markets and capital, as well as the need to modernize production. China and India, the world’s two largest agricultural economies—each with low levels of mechanization—represent significant long-term prospects, although each pose major commercial challenges, as well.

Domestic Competitiveness

The agricultural equipment industry is composed of many niches. Rarely do more than three or four companies occupy a niche, although there are some important exceptions. Deere, CNH and AGCO can be said to occupy one of those niches--for "full-line" manufacturers of equipment for growing and harvesting grain, cotton, and sugarcane. Some of their product lines compete with those of "short-line" manufacturers; examples include sprayers, grain carts, and implements for heavy tillage. These three companies, however, are the only global full-line manufacturers. Their products' high cost and relatively long production runs mean that they account for a significant share of domestic production. From a trade standpoint, their products constitute a large share of international commerce in agricultural equipment.

Overall, U.S. agricultural equipment is very competitive in the domestic market, although the scope and intensity of this competition varies significantly among the industry’s many niches. The scale and diversity of the U.S. agricultural economy provide a strong base for those that wish to do business internationally, as well as for many that are satisfied with the domestic market. Across a wide range of specialized sub-sectors, U.S. manufacturers are almost invariably among the leaders in their fields.

Some segments of the market can be very crowded, however, making the competition all the more intense. The market for low-to-medium horse-power agricultural tractors--up to approximately 275 HP—is especially competitive, both domestically and internationally. Some of the more prominent foreign manufacturers competing in the United States include: Argo Tractors S.p.A. (Italy), Kubota Tractor Corporation (Japan), the Mahindra Group (India), SAME-Deutz-Fahr (Italy), Daedong Industrial (Korea), the Yanmar Co., Ltd. (Japan), and Zetor a.s. (Czech Republic). The three full-line U.S. manufacturers compete in virtually all of the many sub-categories for such tractors, offering premium products in a much broader market. In addition to their iconic brand names, much of the premium depends on the extent and reliability of these companies’ service networks. Even in the high HP range--where Deere, CNH and AGCO are much more dominant—Germany’s Claas and Buhler Industries (of Winnipeg; now a subsidiary of Russia's Rostselmash) also compete.

The large and lucrative U.S. market attracts great interest from foreign competitors in other sectors. In the irrigation equipment segment, Netafim, Ltd. (Israel) and Jain Irrigation Systems, Ltd (India) have large and growing U.S. manufacturing operations. In addition to tractors, Japan’s Kubota sells a range of commercial mowers in the United States. GEA Farm Technologies (Germany) and DeLaval International (Sweden) manufacture and import milking parlor and other farm dairy equipment, as well as a wide range of other equipment and supplies for the dairy industry.

Domestic Environment

The development of biofuels is a major public policy issue for many U.S. agricultural equipment manufacturers. A number of U.S. agricultural equipment manufacturers consider biofuels, especially corn-based ethanol, a major source of sales growth for their industry. The leading full-line manufacturers produce all the equipment necessary to grow and harvest corn, sugar cane, and various grasses and other crops that are current or potential feedstocks for ethanol and biodiesel. Manufacturers of grain storage buildings and other specialty equipment also stand to benefit from biofuels development.

While, in the short term, increases and decreases in biofuel production appear to be dependent on the price elasticity of carbon-based fuel, the Association of Equipment Manufacturers (AEM) continues to view biofuels “as a critical component of any energy policy seeking to improve environmental stewardship and energy independence.” Consequently, AEM supports: “maintaining the biofuel production targets set forth in the Energy Independence and Security Act of 2007; continued funding of research to improve the efficiency of biofuel production; continuing the tax incentives for biofuel production established by the 2008 Farm Bill, and increased funding for agricultural research to increase agricultural output.”

Another group, the “25x25” coalition of equipment manufacturers and other agribusiness companies, advocates that by the year 2025 America’s “farms, forests and ranches will provide 25 percent of the total energy consumed in the United States, while continuing to produce safe, abundant, and affordable food, feed and fiber.”

AEM and U.S. agricultural equipment manufacturers also advocate for permanently shortening the depreciation schedule for their products in the U.S. Tax Code to five years. The Emergency Economic Stabilization Act of 2008 cut the schedule from seven years to five for equipment purchased in 2009. This provision expires in 2010, however, and the industry would like it to be made permanent. AEM argues that the shorter depreciation schedule will encourage farmers to invest in new machinery that is more environmentally friendly and safer to operate, and that it will support America’s rural economy, as well as the U.S. manufacturing sector, while having a “nearly revenue-neutral” affect on the U.S. Treasury.