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Corporates squabble over impact of drought on farm profits

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Will the US farm economy be brought low by drought-reduced yields, or will the boost to prices more than make up for lost production?

Agco warned over a potential setback to agricultural equipment groups, at least, from the US drought even as it unveiled a 50% jump in earnings, and raised expectations for its full-year performance.

However, the caution contrasted with those from many other agribusinesses, including fertilizer giant PotashCorp and crop trader Bunge, which highlighted benefits from the squeeze on crop supplies.

'Strong execution'

Agco, the maker of Massey Ferguson and Fendt farm equipment said that earnings for the April-to-June quarter hit $202.1m, or $2.08 a share, up from $133.9m a year before,

The increase reflected, besides the acquisition of silos group GSI, price rises, especially in North America and Europe, which lifted revenues by 14.1% to $2.69bn.

Meanwhile, costs were constrained by "low levels" of inflation in raw materials costs, reflecting less buoyant energy and metals markets.

"Agco's strong execution in the second quarter produced record earnings and operating margins of nearly 10%," Martin Richenhagen, the group's chairman and chief executive, said.

'Some uncertainty'

However, Mr Richenhagen added that while North American "farm economics remain healthy, the current drought conditions across much of the US have added some uncertainty for farm equipment demand for the remainder of 2012 in the region".

The statement clashed with more positive assessments on Thursday of drought implications for agribusiness giants.

PotashCorp and agrichemicals giant Syngenta forecast that higher crop prices would feed through into higher demand for crop inputs, while Bunge said that market uncertainty would drive farmers and consumers to larger crop traders.

Yield vs price

And Maurice Taylor, chairman and chief executive of tyres group Titan International, forecast a net benefit to growers from the crop crisis.

"I have been visiting farms in North Dakota, Minnesota, Illinois, Michigan and Ohio and I believe the net income to farmers will be equal or greater than the record last year," Mr Taylor, a former US presidential hopeful, said.

"Why? [Farmers] were expecting [a corn yield of] 185-200 bushels per acre but they will not get that this year. They may get 145-150 if this heat continues with no rain.

"If you put the numbers to this at $5 a bushel for corn, that is $1,000 per acre on yields of 200 bushels per acre. But at $8 a bushel at 150 bushels per acre, that's $1,200 per acre."

The economics were "the same with soybeans", he said, adding that growers with irrigation will see record financial results.

"Yes, there will be farmers who will lose their total crop, but they most likely have crop insurance," said Mr Taylor, who ran, unsuccessfully, for nomination as Republican presidential candidate in 1996.

'Warning signals'

However, Agco's assessment chimes with an assessment by Creighton University that conditions in the US farm equipment market have sunk to their lowest since the world recession.

A farm equipment index compiled by the Nebraska-based university from 10 leading agricultural states, including Illinois, Iowa and Kansas, fell to 46.1, the lowest since March 2009. Any figure below 50.0 indicates contraction.

The US drought, the worst since 1956, was "putting a dent" into the economies of farming areas, Creighton economist Ernie Goss said.

"Just as the region has benefited mightily from very healthy farm income over the past few years, we are now detecting warning signals of a significant economic reversal for rural areas.

"Farmers are clearly reducing their purchases of agriculture equipment," he said, adding that "much weaker economic conditions are slowing growth in farmland prices" too.


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