European Ag Business Sentiment Just Off Very High Level in February

Equity Research reports the general business climate for European agricultural equipment has risen sharply.

Equity Research

Sentiment in European farm machinery posted a +47.0 index number for February.

The results for last 12 months were +29.5, +28.6, +30.2, +34.5, +42.0, +44.9, +44.4, +40.8, +45.1, +49.0, +58.9, and +47.0. After hitting bottom at -44 in November 2014, the business climate index (CBI) has shown a general improving trend off the deep negative territory during 2015. In 2016, the index declined again, and reported another low of -44 last August. The index has repeatedly risen since then. After turning into the positive territory in February 2017 for the first time since early 2014, the general business climate has risen sharply. The index incorporates present and future expectations. Both the future expectations and the current evaluation trended lower this month from very high levels and remains in a very strong position indicating a pretty optimistic outlook for Europe. Deere noted that its EU28 retail sales for tractors increased by double digits in February and its combines decreased by double digits.

Overall German tractor registrations decreased 20% year-over-year in February 2018.

Low-horsepower (<100 hp) tractor registrations were down 40%. High-horsepower tractor registrations (100 hp+) decreased 5%, with tractors in the above-150-hp category up 1%. Sequentially, overall tractors increased 42% with a 17% raise in the low-horsepower category and a 60% raise in high-horsepower. Year-to-date, German tractors were down 25%, and the decrease was primarily due to the “Mother” rules pre-buy. The February sales were between 34% low-horsepower tractors and 66% higher-horsepower tractors, which is consistent with the normal seasonality. In February, high-horsepower usually outperform low-horsepower.

U.K. tractors decreased 6% year-over-year in February, following a 10% increase in January. Recall during 2017, U.K. industry volume exhibited the similar pattern with German tractors sales. For the first 10 months last year, U.K. tractors increased 4% and during the last 2 months of the year, U.K. tractors surged 92%. For full year 2017, U.K. tractors were up 14% versus 2016 levels.

The European ag business climate index moderates in the upswing.

Last month, the order volume achieved the best level since 2009. The livestock equipment sector is doing well despite concerns on lower milk prices and an appreciating euro. The business sentiment for the tractor market remains below the industry average for the current evaluations due to the full-forward registration effect in the EU. In the March survey, 3% expect turnover to decrease for the next 6 months, versus 15% a year ago, and 61% of survey participants now expect their business to grow within the next 6 months, versus the 52% levels last year. About 36% of all survey participants expect sales to remain unchanged over the next 6 months. Lastly, 89% of participants evaluate current business conditions as very good, good or satisfying, down from 94% last month; the remaining 11% of participants would evaluate their current business conditions as unfavorable to very unfavorable.

Implications for our coverage universe.

Companies in our coverage universe with exposure to European farm equipment are AGCO, CNH Industrial, Deere, Titan International, and Titan Machinery. AGCO is by far the most leveraged to European agriculture, but Deere also has a strong presence and is the highest-selling brand in the region. Corn and soybeans are the most important for cash crop farming in the United States, and wheat is the largest in Europe. Wheat prices have fallen along with other grains the past several months and are constraining farmer profitability. We do not believe weakness in farm machinery will be confined to only North America, and Europe and Brazil are also experiencing weakness as a result of lower commodity prices, economic and political uncertainty in Eastern Europe, and weaker economic conditions.