Titan beats ag machinery gloom, but hurt by rubber

Titan International dispelled some of the clouds over the farm machinery market but, unveiling a fall into the red, revealed it had tripped over weak rubber prices, which landed it with a "material financial hit".

The maker of tyres for agricultural, construction and mining machinery said it was sanguine over prospects for ag demand, foreseeing that the "overall farm economy will remain strong" this year.

"We do not see the downturn," said Maurice Taylor, the Titan chairman and chief executive, who made an unsuccessful run for the Republican nomination in the 1996 US presidential elections.

While acknowledging declines in crop prices, he said that "it's still very profitable for [farmers], whether it's corn or soybeans.

"Those are your two big drivers. Wheat is still going to stay pretty good, too."

Paul Reitz, the Titan president, added that after a year when the group's agriculture business achieved "good" results, with sales up 9% on a 5% rise in volumes, "we're seeing some good optimistic viewpoints coming from the dealers".

'Saving on expenses'

The comments contrast with gloomy outlooks from farm machinery manufacturers, with Deere & Co last week highlighting "moderating demand for agricultural equipment", and forecasting declines of up to 10% industrywide in the North and South American markets.

On Wednesday, Macquarie cautioned that its research suggested that US farmers were "likely to scale back [machinery] purchases as their margins have been squeezed," with sales of large tractors and combines appearing particularly vulnerable.

Lower margins in the US and Brazil too "will likely limit land expansion and see farmers aim to save expenses. Both affects will likely limit farm machine sales", the bank said.

'Tyre replacement cycle'

And separately on Thursday, Nebraska-based Creighton University said that its index of farm machinery prosperity had indicated shrinkage for an eighth successive month, falling to its lowest reading since May 2009.

"Equipment dealers and farm equipment manufacturers selling domestically are experiencing pullbacks in sales and production," Creighton economics professor Ernie Goss said.

However, Titan may be shielded somewhat from a downturn as tyres wear out on the equipment which has been bought in large quantities in recent years.

"A lot of new equipment have been pumped into the market over the last few years, and you're starting to hit that tyre replacement cycle on that," Mr Reitz said.

'Material financial hit'

Nonetheless, Titan reported a loss of $15.58m for the October-to-December quarter, compared with earnings of $8.18m a year before, a decline blamed on falling rubber prices.

The decline had caught out Titan, which had bought its rubber somewhat in advance at higher prices, but felt impelled nonetheless to pass on declining market values to customers through lower-priced tyres.

"Due to falling rubber prices, the business experienced a material financial hit in 2013 as price reductions had to be passed on to our customers and margins were therefore sacrificed," Mr Taylor said.

"Tyres are being replaced at a 30% discount given the lower rubber prices, therefore companies are reducing inventory to the lowest levels to replace with cheaper tyres."

Market reaction

Titan shares stood 1.2% lower at $17.055 in afternoon deals in New York.

The group's quarterly loss was the equivalent of $0.29 a share, compared with the $0.15-a-share profit expected by Wall Street.

Separately on Thursday, plantations group Sipef forecast that 2014 would "remain a challenging year for the rubber producers", with large stocks set to "keep a lid on prices". 

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