Like a weed, downturn sinks roots into U.S. farms

A field of soft red winter wheat about a week away from harvest is pictured in the Chicago suburb of Naperville, Illinois, June 24, 2007.

CHICAGO (Reuters) - The downturn that has spent the past year-and-a-half rattling through the global economy appears to have finally rolled into the farm sector, which had seemed largely insulated from the crisis.

In recent weeks, a series of worrisome trends, including a spike in delinquencies on loans tied to farm equipment as well as layoffs and a restructuring at Deere & Co (DE.N), have suggested farmers -- and the companies that supply them -- are feeling the pinch.

The signs come as Deere, the world's largest maker of tractors and harvesters, and rivals Agco Corp (AG.N) and CNH Global NV (CNH.N) enter their key selling season and prepare to report quarterly earnings.

The four months between March 1 and June 30 account for more than 40 percent of all big tractor sales, according to the Association of Equipment Manufacturers. The key selling season for harvesters is later in the year with nearly half of all units sold between July 1 and October 31, AEM data shows.

So far, the signs are not encouraging. Row crop tractor sales fell 7 percent year over year in March, according to the most recent report from AEM, while four-wheel-drive tractor sales fell 14 percent.

"The stresses are indeed growing," said John Urbanchuk, an economist and agriculture expert at the consulting firm LECG.

A key culprit: The retreat in commodity prices, which is expected to translate into sharply lower farm incomes this year, according to the U.S. Department of Agriculture. Also playing a role: A sharp drop in farm exports, which had boomed in recent years as the world experienced a synchronized expansion.

Now that the world is locked in a synchronized slowdown, and the dollar has risen, overseas demand has fallen.

Since equipment purchases are highly correlated with farm income, the implications for tractor and combine sales are not good.

"There were a lot of anecdotal reports in 2008, when corn prices were $6, $7, $8 a bushel, and soybean prices were in excess of $12 a bushel, of farmers going out and spending wildly on a whole host of things," Urbanchuk said.

"That environment has reversed itself. Things this year and next year are likely to be a lot less robust and as a consequence farmers are not going to be as enthusiastic buyers of equipment."

DELINQUENCIES

At the same time, some of the farmers who bought equipment during last year's boom clearly overextended themselves and are now having trouble making their monthly payments, according to data from PayNet.

The Skokie, Illinois-based commercial credit tracker, which has a database of 14 million commercial contracts worth $645 billion, says severe delinquencies on loans, leases and lines of credit tied to agricultural equipment have surged over the past year.

The percentage of farm equipment loans delinquent 90 days or more nearly tripled over the past year, according to Bill Phelan, PayNet's president. At the same time, overall severe delinquencies on commercial loans have risen only 47 percent.

"Lenders that provide credit to the agriculture industry are finding a lot more distress out there," he said.

But the delinquency problem appears to be particularly acute for the captive finance arms of the farm equipment manufacturers.

PayNet's data shows that 2.77 percent of all loans made by the captives are now delinquent 90 days or more; by comparison, only 0.83 percent of all ag loans made by banks and specialty finance companies not affiliated with the OEMs are severely delinquent.

"It's three times as much," Phelan said. "That's substantial."

STILL DOING OK

Together the trends help provide context to a series of job cuts at Moline, Illinois-based Deere.

On Tuesday, the company said it was combining its agricultural equipment division with its smaller commercial and consumer equipment unit, a restructuring it said would save money and eliminate about 200 jobs.

That announcement came just one week after Deere laid off 160 workers at its Des Moines works, where it makes tillage, planting, spraying and cotton harvesting equipment, and just weeks after it cut more than 325 jobs in its construction and forestry division and about 500 jobs at a Brazilian plant.

"Agriculture isn't the safe haven any more in the industrial space," said John Kearney, an analyst at Morningstar. "They're not immune to what's going on."

Still, Kearney says, the farm sector probably remains healthier than many others and this year's downturn comes on the heels of the best year ever for farmers.

"Farmers are still doing OK," he said. "Their balance sheets are in good shape. It's just that they pick up the paper just like everybody else and see what's going on and aren't encouraged to go out and make big capital equipment purchases."

(Reporting by James Kelleher, editing by Matthew Lewis)