Farmers and their suppliers have rarely had it so good, but who will be left holding the baby?
The owners of John Deere, the world famous brand of tractors and other agricultural machinery, normally painted green with yellow trim and decorated with a leaping deer logo, can’t spend their capital dollars fast enough at the moment as the demand for agricultural commodities in China and India has led to another boom year for farmers.
Deere & Company, the actual company name, the biggest manufacturer of agricultural machinery in the world, reported better than expected earnings at the end of April. Revenues were $10bn, up from $8.9bn a year earlier and ahead of the forecast of $9.7bn. The only area not keeping up was its finance arm held back by low interest rates and higher administration costs.
It said it was expecting things to continue so it is building more capacity to take advantage of these boom times in the agricultural sector. In all it has 12 major projects around the world including seven new factories. All this has come about because of a rare boom in a broad range of agricultural commodity prices. Not since 1973-4 have so many risen in price at much the same time. Along with China and India, this demand is coming from the US, and Eastern Europe, but the rest of the world is doing just fine too.
While Deere & Company are unlikely to be much affected if they over invest on the back of this boom, I have met many people who have invested in things that have also had a boom period only to find out that it was a bust for them. I have found that it is rarely a good idea to pile into a “mature boom”. It can work out but it is often more of a speculation than an investment.
As far as agricultural commodities go we have already had an exceptional period of demand growth so overcapacity, that will drive prices down again for at least some of these commodities, will be on the horizon pretty soon. I predict some big pay days coming up for commodity brokers who pick the peak for pork bellies, or the like and wonder if, in the end, it will be John Deere or its customers who find themselves over capitalised.
Will the lovely new tractors be idle and unproductive in the factories, or in the fields?