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America's Farmers Turn to Bank of John Deere -- -2-

19 Jul 2017 6:33 am

In turn, it has provided farmers with machines for one to three years for a fraction of their purchase price, alleviating the need for loans. A new tractor costing $250,000 can be leased for about $30,000 a year. That compares with the cost to buy with a loan, which would require a 20% down payment of $50,000 and more than $40,000 a year in payments for five years for the remaining $200,000 with 5% interest.

"What a lease afforded [farmers] was a payment that was predictable," said Deere's Ms. Sandquist. "We didn't set about a strategy to use leasing."

At the end of a lease, many farmers have returned their machinery to dealers, adding to an already oversupplied market for used equipment. That pushes down the price farmers who own can get for their used machines, discouraging trade-ins for new models. The lower prices also erode profits for Deere when the machinery is eventually sold.

"We see the value of used equipment dropping off," said Cameron Hurnard of Iron Solutions Inc., which tracks prices for late-model used farm equipment.

Deteriorating prices for used equipment and the reluctance to take on more debt are souring many farmers on owning as an investment to build farm equity, which had been a key selling point for Deere's high-value machinery.

"I don't believe I'll ever buy again," said Mark Gath, a farmer in Luverne, Minn., who recently decided to lease four combines and five tractors from the company instead of borrowing money to buy. "I don't have a bank looking at me saying: 'You've got $5 million of equipment debt. What are you going to do?' "

At the end of fiscal 2016, Deere carried leases on farm and lawn equipment worth $4.8 billion, up 22% from the previous year.

Deere quit offering one-year leases last year when it experienced a deluge of returned equipment that the company had originally valued at higher than the market for used equipment. Eliminating short-term leases pushed down the new-lease volume this year, but farmers are still taking longer leases. The longer-term contracts benefit Deere by having farmers pay more of the machinery's cost through their payments.

Deere executives said they are seeing better prices and shrinking inventories for used equipment, as well as improving order volume for new models.

Ms. Sandquist said farmers' interest in leasing is waning as their appetite for buying grows again. "We are certainly seeing leasing coming down, and we're seeing stabilization in used values," she said.

The company increased its equipment sales growth forecast for the year to 9% from 4% in May, and it cranked up its net profit outlook to 33% growth, to $2 billion.

The longer low commodity prices persist, however, the less effective equipment leasing will be at injecting life into the new machinery market, say some analysts. What Deere has done "spreads out the pain but it can't eliminate it," said Barclays' Mr. Wertheimer.

On the other hand, if adverse weather boosts grain prices in the long run, "then what John Deere is doing is very smart," said Mr. Irwin, the University of Illinois agricultural economist, about Deere's overall financing activities. "They're providing the financial cushion and waiting for bad weather."

Turning farmers like Michael Oliver into buyers again will be critical for Deere's future.

Mr. Oliver, who farms 32,000 acres near Cadiz, Ky., said he used to trade in and purchase about $12 million worth of machinery -- seven combines and a dozen tractors -- every year before sliding crop prices caused him to start leasing three years ago. But he recently concluded that even that was too costly. He is now extending warranties on old equipment he already owns, saying: "We're going to use our own equipment, and it looks like we're going to be keeping it for a while."

(END) Dow Jones Newswires

July 19, 2017 02:33 ET (06:33 GMT)

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