After several years of rising row crop prices, a perfect storm of high crop production (in excess of demand), a sharp correction in grain values and contracting farmer margins in mid-2014 has resulted in declining sales of agricultural equipment sales. This trend is expected to continue through 2017, according to Rabobank's recent report, 'Contraction Today, Consolidation Tomorrow?" Despite the challenges, there is room for growth through consolidation and mergers among the original equipment managers (OEMs) and other farm inputs businesses. 

"At its core, demand for agricultural equipment and machinery is driven by grain demand, commodity prices and farmer income," commented Ken Zuckerberg, Executive Director and Senior Analyst of Rabobank's Food & Agribusiness Research and Advisory. "The drop in corn and soybean prices inevitably lead to the decline in demand for farm machinery and equipment, as these items are usually the first farm input purchase to be delayed or eliminated during a downtown."

Tractor sales are weathering the downturn the worst. North American tractor sales decreased by 14% to 18% in the first six months of the year on a retail units sold basis. The contraction in revenues has been even worse, with the three major OEMs, Deere, CNH and AGCO, reporting revenue declines for North America agricultural and turf equipment ranging from 22% to 37%.

"In response to the broader downturn, OEMs have responded by temporarily suspending production, working closely to reduce inventory levels and attempting to mitigate overhead expenses," added Ken. "Unfortunately, these measures are temporary and defensive, and do not solve the long-term structural challenges associated with lower demand and limited organic growth prospects in a mature market like North America."

The report highlights three consolidation scenarios Rabobank sees occurring in the next three to five years in response to the challenging operating environment:

1. Mergers among the five largest original equipment manufacturers, excluding the market leader Deere & Co. There is a legitimate business case for a competitor of equal size to Deere to materialize after a merger.
2. Acquisitions of smaller harvesting and implements equipment manufacturers by those five players as a means to diversify product offerings and achieve operational efficiencies through enhanced scale. 
3. Horizontal mergers & acquisitions into adjacent markets that are less correlated with crop prices, such as grain storage and animal protein production systems.