Farmers and analysts say the elimination of government incentives to buy new equipment, a related overhang of used tractors, and a reduced commitment to biofuels, all darken the mood for the US agricultural finance sector – and its captive finance companies.

Net income at John Deere Capital Corporation (JDCC) fell to $126.9 million for the third quarter to July 31, 2015 and to $376.4 million for the year to date.

This compares to $129.2 million and $390.0 million for the respective periods the previous year.

Less favorable finance spreads

The decline was primarily due to less favorable financing spreads, partially offset by growth in the credit portfolio and lower selling, administrative and general expenses. Last year's year-to-date results also benefited from a favorable effective tax rate.

Net receivables and leases financed by JDCC were $33.400 billion at July 31, 2015, compared with $33.534 billion last year.

Meanwhile, JDCC’s parent, John Deere, reported a decrease in worldwide net sales and revenues of 20%, to $7.594 billion, for the third quarter and a fall of 18%, to $22.147 billion, for nine months. Net sales of the equipment operations were $6.840 billion for the quarter and $19.843 billion for nine months, compared with $8.723 billion and $24.918 billion for the periods last year.

Samuel R. Allen, chairman and chief executive officer explained: "John Deere's third-quarter results reflected the continuing impact of the downturn in the farm economy as well as lower demand for construction equipment.

 "Nevertheless, all of Deere’s businesses remained solidly profitable, benefiting from the sound execution of our business plans and the success of our efforts to develop a more agile cost structure. As a result, the company continues to be well-positioned to provide customers with technologically-advanced products and services, while funding its growth plans and returning cash to stockholders.”

Company equipment sales are expected to decrease about 21% for fiscal 2015 and to be down about 24% for the fourth quarter compared with year-ago periods.

Included in the forecast is a negative foreign-currency translation effect of about 4% for the full year and 5% for the fourth quarter. For fiscal 2015, net income attributable to Deere & Company is anticipated to be about $1.8 billion.

According to Allen, Deere's performance in 2015 underscores its success establishing a wider range of revenue sources and more durable business model. "By continuing to report solid profits in a difficult environment, the company is showing great resilience and performing much better than in previous agricultural downturns."

Longer term, Allen said he remained quite confident about the company’s prospects: "We believe our steady investment in new products and geographies will make Deere the provider of choice for a growing global customer base and that the impact of these actions will become increasingly clear when our end markets recover.

"In our view, favourable trends based on a growing, more affluent, and increasingly mobile population, have ample staying power. For all these reasons, we have confidence in the company’s present course and its ability to deliver significant value to customers and investors in the years ahead."

For fiscal-year 2015 net income attributable to JDCC is expected to be approximately $630 million. The forecast improvement over last year is primarily due to the divestiture of the crop insurance business and growth in the average credit portfolio. These factors are being partially offset by less favourable financing spreads, a less favourable tax rate, and an increased provision for credit losses.

Agriculture & Turf

Deere's worldwide sales of agriculture and turf equipment are forecast to decrease by about 25% for fiscal-year 2015, including a negative currency-translation effect of about 5%.

Lower commodity prices and falling farm incomes are continuing to pressure demand for agricultural machinery, with the declines most pronounced in higher-horsepower models. Conditions are more positive in the US livestock sector, supporting some improvement in the sales of smaller sizes of equipment.

Based on these factors, industry sales for agricultural equipment in the US and Canada are forecast to be down about 25% for 2015.

Full-year 2015 industry sales in the EU28 are forecast to be down about 10%, with the decline attributable to lower crop prices and farm incomes as well as pressure on the dairy sector.

In South America, industry sales of tractors and combines are projected to be down 20 to 25% mainly as a result of economic uncertainty in Brazil and higher interest rates on government-sponsored financing. Asian sales are projected to be down moderately, with most of the decline in India and China.

Industry sales in the Commonwealth of Independent States are expected to be down significantly due to economic pressures and tight credit conditions.

Industry sales of turf and utility equipment in the US and Canada are expected to be flat to up 5% for 2015, benefiting from general economic growth.

Construction & Forestry

Deere's worldwide sales of construction and forestry equipment are forecast to be down about 5% for 2015, including a negative currency-translation effect of about 3%.

The forecast decline in sales reflects the impact of weakening conditions in the North American energy sector, as well as lower sales outside the US and Canada.

In forestry, global sales are expected to be flat to up 5% in comparison with last year’s attractive levels, as gains in the US and Europe are offset by declines elsewhere.