U.S. farmers turn to equipment leases to cope with profit slump

By P.J. Huffstutter and Tom Polansek

CHICAGO, Feb 23 (Reuters) - U.S. farmers nervous that slumping grain prices will crimp profits are increasingly leasing equipment instead of buying it, creating new risks for manufacturers like Deere & Co that could suffer from declining values for leased machinery.

Farmers, facing weak markets after years of cashing in on soaring crop prices, are readjusting to a new normal in which they scrutinize every expense, particularly high-ticket items like massive shiny tractors and planters.

The shift toward leases is the latest ripple effect from the downturn in the farming economy, which the Agriculture Department predicts will cut net farm income by more than 30 percent this year to $73.6 billion, the lowest since 2007.

Deere, the world's largest maker of farm equipment, on Friday reported a 43 percent drop in first-quarter profits due to reduced demand.

Last year, the company known for its signature green and yellow vehicles saw a small increase in leases versus purchases, said Tony Huegel, director of investor relations, on a call to discuss earnings. A company spokesman declined to provide data.

Deere has said in regulatory filings that its estimates for the value of its leased equipment on the used market, after leases expire, jumped 66 percent in recent years to $2.78 billion as of Oct. 31. An increase in the size of its leased fleet is the main driver of the growth, documents show.

Analysts have noted the shift to leasing.

"We're seeing some farmers even probably liquidate some of their fleets and move towards that model" of leasing, Lawrence De Maria, co-head of global industrial infrastructure at William Blair & Co, told Deere executives on the earnings call.

Switching to equipment leases allows farmers to take advantage of historically low interest rates and frees up capital for other financial needs, such as buying seed produced by companies like Monsanto Co and DuPont Pioneer, along with fertilizer and paying farmland rents.

Equipment leases began gaining in popularity last year, when corn prices fell 6 percent after a decline of nearly 40 percent in 2013, said Andy Huneke, director of leasing and trade credit for AgStar Financial Services ACA.

AgStar, one of the nation's Farm Credit associations, works with dealerships for equipment manufacturers, including Deere, Agco Corp and Case IH. At one typical U.S. dealership last year, 17 percent of equipment was leased, up from 6 percent in 2013, Huneke said.

"It gives producers a lot more flexibility, where they're not committing long term to equipment during a challenging time," he added.

Agco Chief Executive Martin Richenhagen has seen an increase in leasing but said interest started years before the recent softening in the farm economy.

Case IH, a brand of CNH Industrial, did not respond to a request for comment.

Deere's Huegel said there are "very aggressive leasing programs that are rumored to be in the market," but the company is not participating in them.

Leases make up only about one-tenth of Deere's equipment portfolio, Chief Financial Officer Rajesh Kalathur said, adding the company will "continue to manage our residual values very conservatively."

Growth in leased fleets of tractors, combines and other equipment could impact earnings per share in the future, particularly if weakness in the farm economy accelerates the decline in the value of machinery, market analysts said.

Deere projects that if future market values for the fleet of equipment it leases to farmers falls by 10 percent from current estimates, it would increase annual depreciation for the fleet by $125 million, according to regulatory filings.

That would reduce Deere's earnings per share by close to 25 cents -- a near 5 percent hit to Wall Street's consensus earnings estimate of $5.49 per share for fiscal year 2015, according to JP Morgan.

(Editing by Phil Berlowitz)