While attending the Farm Progress Show in Decatur, Ill., last month, Morningstar equity analyst Kwame Webb said during his visits with the three major equipment manufacturers, three major trends emerged. These included substantial investments in telematics, less emphasis on high horsepower equipment, and an ongoing push to reduce their own and dealer inventories.

Following meetings with top managers at AGCO, Deere and CNH Industrial, Webb said, “We think overall sentiment is on par with recent company reports of oversupply in the farm equipment market. In North America, new and used equipment inventories remain high, and an anticipated sales decline of 25-30% in 2015 is likely to weigh on 2016 sales unless there is a weather abnormality that improves farm economics.”

Telematics Tech

Telematics remains a key area of investment for the major tractor makers, according to Webb. “Everyone appears to be making substantial telematics investments, albeit no one could quantify the expected economic benefit.”

He said during a recent earnings call, he was surprised when Deere revealed that its telematics research and development spending is equivalent to what it is spending on large tractor R&D. “This is noteworthy, as Deere’s large tractors are traditionally its highest margin products. Additionally, market share leaders like Deere and Case appear to be pursuing strategies that are more proprietary in an attempt to keep incumbent product buyers in their product ecosystems.

“AGCO, the global number three player, is more heavily emphasizing an open solution in an attempt to latch on to more brand-agnostic buyers. It is also emphasizing grain storage and processing technologies as it is the only global tractor maker that is also highly active in those markets. Longer term, we believe equipment buyers will embrace telematics and the Big Data approach to creating crop production efficiencies.”

Flexible Use Products

Webb said he noticed there was less emphasis on expensive high horsepower equipment and more emphasis on value-oriented and flexible-use products at the show.

“Near term, cost-conscious buyers were able to see many value-oriented products at this year’s show,” Webb said. “Most operators highlighted that they have launched certified used equipment programs in the past 12-18 months to help reduce excess used inventory at dealers. The show spotlighted middle-of-the-line equipment or multi-use equipment, acknowledging that in an environment of largely depressed farm economics, farmers are less focused on buying top-of-line and highly specialized equipment unless it offers a compelling value trade-off. All of the manufacturers made it clear that their dealers had a product for price-sensitive buyers.”

Lower Inventories

The third trend among the majors, according to Webb, was the ongoing efforts to reduce dealer and manufacturer inventory levels, which remains a key priority. “During our meetings, all manufacturers reminded investors that their current production levels are below retail sales volume as they attempt to liquidate excess inventory and improve free cashflow.”

He pointed out that each of the three largest tractor manufacturers continued to emphasize that they’ve reduced production volume below end-market demand to improve their 2015 free cashflow outlook as well as to reduce overall dealer inventory levels. “In another bid to improve dealer inventory levels, CNH Industrial mentioned that traditional dealer incentives that were 15% dedicated to used products have now grown to 50% of incentives in the current marketplace,” said Webb.