‘Our factories are hungry’ – U.S. farm machinery maker faces dearth of components

FILE PHOTO: People look at AGCO equipment as they attend National Farm Machinery show in Louisville
FILE PHOTO: People look at AGCO equipment as they attend National Farm Machinery show in Louisville, Kentucky, February 12, 2016. REUTERS/Meredith Davis/File Photo

April 19, 2021

By Rajesh Kumar Singh

CHICAGO (Reuters) – Farmers flush with cash after a run-up in grain prices are clamoring for farm machinery maker AGCO Corp to get them new equipment in time for this year’s harvest.

This is a boom time for the Georgia-based company after years of depressed demand. But AGCO is scrambling to keep up because disruptions all along its supply chain have left it short of the steel, plastics, microchips and tires it needs to make tractors and combines. Some of its suppliers in the United States and Europe are facing a labor crunch because of the coronavirus pandemic.

The supply logjam has hit AGCO, one of the world’s largest farm machinery makers, just as planting season gets under way in the Northern Hemisphere. The Southern Hemisphere is in the middle of its harvesting season. AGCO has had to tell customers they may have to wait as long as six months for their machinery – effectively too late for the harvest in the United States, a major producer of corn and soybeans.

“Our factories are hungry right now,” said Greg Toornman, who oversees AGCO’s global supply chain management.

The farm equipment maker is not alone. Other farm equipment makers affected by the supply logjam include Deere & Co, and CNH Industrial.

As the U.S. economy roars back from the pandemic-induced recession, it is generating unusually high orders for parts and materials at a time when inventories are at the lowest level in decades and the pandemic and weather-related disruptions have left global supply chains in a mess.

The Institute for Supply Management’s index for new orders in March hit its highest level since January 2004, while the index for order backlogs, one of the best U.S. metrics for how quickly manufacturers are meeting demand, was at the highest level in 28 years.

See graphic on new orders: https://tmsnrt.rs/3sjSuB5

The delays and lack of needed materials are holding back the pace of economic recovery, translating into inflationary pressure and threatening to weigh on corporate profits. 3M Co, which makes industrial adhesives, recently warned that elevated manufacturing and logistics costs could cut its profit this year by as much as 20 cents per share.

For farm machinery companies like AGCO, whose business is highly seasonal, sourcing problems could mean lost sales.

TIGHT INVENTORIES

Lonn Schlueter, an Iowa-based dealer who sells rival equipment maker CNH Industrial’s New Holland tractors and Kinze’s planters, told Reuters he is scouting for used tractors as the orders for new ones are not expected to be delivered before the end of the year.

“The big problem is getting inventory, getting the product to sell,” Schlueter said. “We are told that the manufacturing is really delayed because they can’t get raw products to finish up the machines.”

See graphic on customers’ inventories: https://tmsnrt.rs/3aeQyUq

Tractor supply in North America is the tightest in 18 years, according to Jefferies Equity Research. A recent Morgan Stanley survey of U.S. farm equipment dealers noted concerns about the potential impact of a lack of inventory on sales.

While dealers of all major farm equipment brands complained of tight inventories, the survey found that the situation was worse for those selling Deere’s equipment.

The Illinois-based company declined to comment. However, in February, Deere told investors it was facing growing constraints for some electronic components.

CREATIVE SOLUTIONS

AGCO is prioritizing orders that dealers have received from customers over those placed to replenish stocks at showrooms. Chief Executive Eric Hansotia said he is talking to the company’s top suppliers and using “creative solutions” to get a handle on the supply situation.

The company is relying more on air freight to move components and is buying machines, particularly in South America and Europe, to help suppliers ramp up. It has added more shifts on weekends and moved production into its own factories in cases where suppliers are out of capacity.

AGCO is also storing excess raw material in its warehouses and has authorized its suppliers to procure up to 30 weeks of materials that are in short supply.

It is trying to leverage its network of global suppliers to address the shortfalls.

See graphic on order backlog: https://tmsnrt.rs/3gcTMeU

For example, capacity constraints and dwindling rubber supplies in part due to strong Chinese demand are causing tire shortages, particularly in Brazil. To get around the problem, AGCO is shipping tires to its factories in the South American country from suppliers in Asia and Europe – a departure from the company’s standard policy of buying them locally.

In the United States, it has shifted production out of some locations where it has become difficult to increase headcount because of COVID-19 restrictions.

“It’s our number one challenge right now by far – managing all the logistics and the volatility in the system,” Hansotia told Reuters.

‘I HAVE NEVER SEEN ANYTHING LIKE THIS’

It is a sharp contrast from last spring when machinery companies including AGCO were cutting production, anticipating a prolonged downturn in equipment demand. Back then, no one expected “a hot market like this,” Hansotia said.

The shortages have not yet interrupted AGCO’s production, but its procurement team is working feverishly to secure alternative supplies of semiconductor chips, steel and plastics.

While farm equipment makers require far fewer chips than automakers, the drive to make their machines smarter has made them susceptible to chip supply shocks.

Toornman said the number of chips going into AGCO’s tractors has gone up “substantially” in the past decade. As a result, chips are the first item on the agenda at its weekly meetings on supply chains, he said.

Meanwhile, a slow ramp-up in steel production following the cuts last year has made it difficult to procure the metal on time and at a competitive price. Similarly, mass blackouts in Texas following a historic February storm has sparked a global plastics shortage.

Toornman said the wait times for both the raw materials have doubled. He expects steel shortages to persist through the year but has little clarity on when the supplies of plastics would normalize.

“I have never seen anything like this,” Toornman said. “It is … like a perfect storm.”

(Reporting by Rajesh Kumar Singh in Chicago; Editing by Caroline Stauffer and Matthew Lewis)