(Dow Jones) -- For nearly two centuries, Deere and Co. has built equipment to help farmers plant and harvest their crops. Now, the company's financial muscle is doing more of the work.
Throughout the Farm Belt, low prices for corn, soybeans and wheat are putting a strain on U.S. grain farmers, making it harder to get bank lending to plant a crop, or commit to purchasing multimillion-dollar fleets of new equipment.
Deere, the world's largest manufacturer of tractors and harvesting combines, is stepping in to fill the gap. It already lends billions to finance farmers' purchases of equipment. Now, it is providing more short-term credit for crop supplies such as seeds, chemicals and fertilizer, making it the No. 5 agricultural lender behind banks Wells Fargo, Rabobank, Bank of the West and Bank of America, according to the American Bankers Association.
Deere has also expanded its leasing program to get the company's green and yellow tractors into the hands of farmers, even when they are unable or unwilling to pay hundreds of thousands of dollars to buy one.
Its financing has helped farmers stay in business while generating income for Deere during the worst market for machinery sales in more than 15 years.
Farmers' incomes will decline for a fourth year this year, to half what they were in 2013, the U.S. Department of Agriculture projects. And inflation-adjusted debt is at a level not seen since the 1980s farm bust.
In shoring up the ailing sector, Deere's loans may be helping draw out the pain for farmers, allowing them to continue to rack up debt despite a glut of grain world-wide that is keeping a lid on crop prices. The increase in equipment leasing, meanwhile, is weakening Deere's own market for sales.
If crop prices remain subdued, "you're just prolonging the agony and potentially building up [farm] losses instead of cutting the pain, cauterizing the wound and stanching the flow of financial blood now," said Scott Irwin, an agricultural economist at the University of Illinois.
But if poor weather ultimately spurs grain prices higher, Mr. Irwin said, the risks of farm lending likely would be forgotten, and Deere could win new or more loyal customers.
Deere said it is responding to greater demand for leased equipment from farmers and for short-term credit from other farm-industry manufacturers such as seed companies that are offering aggressive financing through Deere as a sales incentive.
"Our core mission is to support sales of equipment," said Jayma Sandquist, vice president of marketing for the U.S. and Canada for John Deere Financial, the company's financing unit. "It's a cyclical industry. We've built a business that we can manage effectively across all cycles, and our performance would indicate we can do that."
The financing arm has shielded the Moline, Ill., company from the worst of the farm slump, keeping factories and dealers intact and investors satisfied with profits. Despite a 37% drop in sales of its farm equipment since a record high in 2013, Deere's stock price is up 72% from its recent low in early 2016 and up 22% since the start of 2017.
Deere Financial's portfolio of loans and leases, which includes short-term lending, leasing and multiyear loans for equipment purchases, totaled $34.7 billion at the end of the company's 2016 fiscal year, in October.
Since 2013, the total value of equipment leases held by Deere is up 87%. Loans for farm equipment purchases, meanwhile, have fallen 10% since peaking in 2014, reflecting sliding machinery sales.
Short-term credit accounts for farmers -- used for items such as crop supplies and equipment parts -- are up 38% since the end of 2015. As of early 2017, the bank operation of Deere Financial had handed out about $2.2 billion. It is close on the heels of the No. 4 agricultural lender, Bank of America, which has about $2.6 billion out.
"Deere Financial is a massive force," said Robert Wertheimer, a Barclays analyst. Deere, which accounts for about two-thirds of all the big tractors sold in the U.S., "is able to influence this market. They have more market power than most companies."
Rob Zeldenrust, senior agronomy manager at North Central Co-op in Mentone, Ind., said a farmer who grows corn, soybeans and wheat on 1,000 acres likely would need $250,000 to cover the cost of seed, fertilizer, chemicals, spraying and fuel for a single growing season.
Suppliers like Deere can be a lifeline for farmers such as 59-year-old Harry DuRant in South Carolina. DuRant leases a tractor from Deere, and has charged seed and chemical purchases to lines of credit held by Deere and other suppliers. Together with loans from his local bank, the financing has helped him plant corn, soybeans, peanuts, cotton and other crops despite losing money for three years out of the past four. It has helped him weather floods, a hurricane and total crop failure.
But low commodity prices are making it difficult for DuRant to pay off past debts without taking on new ones. "It's a vicious cycle," DuRant said, noting that seed companies continually introduce more expensive, higher-yielding varieties of corn and soybean seeds that appeal to farmers like himself, despite a global oversupply of crops and low grain prices. "I buy into it because I'm a grower, so of course I want to make 150-bushel corn instead of 120-bushel corn. All we're doing is making the situation worse."
Supplier credit has long played a role in the financial plumbing of the U.S. heartland. But it has grown more crucial in recent years as commercial banks have become choosier, increasing interest rates and collateral requirements and denying financing for some farmers altogether.
The volume of new loans for farm operations originated by banks in the first half of 2017 fell 7% from a year earlier, according to the Federal Reserve Bank of Kansas City, following a decline in the first half of 2016. Loan volumes in the second quarter ticked up slightly, the bank said.
"It used to be you showed up [at a bank] and said you were a farmer and they said please let us lend you something," said Illinois farmer Aaron Wernz, noting that several years ago a $100,000 loan for operating expenses could be secured with a phone call. "Now they want to make sure their t's are crossed and i's are dotted."
Nate Franzen, president of the agribusiness division of First Dakota National Bank in Yankton, S.D., said the number of high-risk loans at his bank has quadrupled to 12% in the past two years. The bank is working to restructure debt for some borrowers, and urging others to sell land or equipment or vacation homes. He has had to tell a few farmers it couldn't finance them at all.
"As producers get overextended, banks like mine say 'I can't go any further,' " said Franzen. " 'We're not going to stick with you until it's all gone.' "
Agribusinesses such as Monsanto Co., DuPont Co., Dow Chemical Co. and agricultural co-ops nationwide offer financing on crop supplies through in-house programs or in partnership with lenders like Deere and Rabobank.
BASF SE, one of the world's largest suppliers of pesticides to farms, offers financing exclusively through Deere, and says its program has expanded in the past five years.
CHS Inc., a large farmer-owned cooperative in the U.S. that lends widely to farmers, is holding about $250 million in debts owed by a single farm operation, according to court documents.
Deere's main rival, CNH Industrial NV -- the maker of CaseIH and New Holland equipment brands -- has also turbocharged its leasing program.
But Deere has expanded the reach of its financing business well beyond machinery, and far more than any other manufacturer in the farm sector. The financing business accounted for a third of its net income in fiscal 2016, up from 16% in 2013.
Deere's lending arm regularly yields profit margins much greater than Deere's margins for equipment sales -- in 2016, the net margin for financial services was 16%, compared with 4.5% for equipment.
Financing profits have also suffered less during the downturn; net income from financing activities fell 17% from 2013, while net income from the equipment business plunged 57% in that period.
But Deere's loan or lease balances more than a month past due have doubled since 2012 to $434 million at the close of fiscal 2016, according to an annual regulatory filing for a Deere financial subsidiary for its U.S. business.
The amount of debt Deere said it won't be able to collect has doubled since 2014 to $103 million, with more than half of that amount from its crop-supplies credit program.
Losses at Deere's financial arm still remain minuscule relative to the size of its finance business. The company said mounting farm debt isn't a significant risk given still-high equity levels -- the difference between total assets and total debt on farms. "We have many good customers that can continue to repay and stay consistent across underwriting," said Deere's Sandquist.
In the longer term, Deere's aggressive leasing activity threatens its core business of selling large, high-horsepower tractors that can cost more than $200,000 a piece, and harvesting combines priced at more than $500,000.
Deere accelerated its equipment leasing in 2014 when sales plummeted following almost a decade of rapid-fire purchases by farmers flush with cash. The leasing business has kept Deere from having to idle factories and has provided dealers with income from replacement parts and services for leased equipment.
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 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.
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' 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 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."
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