Farmers' hard times, industry squeeze prompted Harvester deal
Chicago — It is tempting to call it a sign of the times. On Monday, one of the largest and oldest manufacturers of farm equipment announced it was bailing out of the business. Officials at International Harvester Company say they will concentrate on making their popular line of trucks.
The move, though widely expected, is dramatic.
In a single stroke, the configuration of the agricultural implement industry could be changed. As proposed, much of the company's North American agricultural division would be bought by Tenneco Inc. and combined with its J. I. Case subsidiary, - a maker of large tractors. The combination could prove to be a powerful rival of Deere & Co., the industry leader.
Just as important, Harvester's move has sent a tremor rippling through agricultural America, which has already felt the rumblings of discontent.
''It's a stark recognition of the upheaval that's occurring in agriculture,'' says LaVon Fife, senior economist at International Harvester. Farmers are being squeezed by low commodity prices, high interest rates and plummeting land values. Some have been forced out of business.
The implications of that upheaval, however, are unclear. Do the current rumblings in agriculture signal a bigger storm to come - or the last vestiges of one that has already hit? What's the future for farming in the United States?
For the farm implement industry, the proposed combination of J. I. Case and International Harvester marks an important change.
The industry has been mired in red ink and suffered from overcapacity for the past five years. Even industry officials have predicted that somehow the industry must shrink. The Harvester-Tenneco deal, which still must be approved by Harvester's creditors and not run afoul of federal antitrust laws, is seen as one of the best ways to accomplish that.
''We see this situation as a win-win,'' Harvester chairman Donald D. Lennox said at a press conference announcing the deal with Tenneco. Harvester eliminates a cash drain on its profitable truck division. And Tenneco gains combines and farm implements to fill out and shore up its line of Case tractors. It will also nearly triple the size of its dealer network.
''The key is you are eliminating 35 to 40 percent of capacity,'' which would take care of much of the industry's overcapacity, says John E. McGinty, an analyst at First Boston Corporation.
Operations under Tenneco will be trimmed down; International Harvester will eliminate some of its own. And the deal may spark mergers among other farm-implement manufacturers who are in shaky positions themselves.
A Case-Harvester combination could be a powerful rival to Deere, Mr. McGinty says. It would nearly rival Deere's 45 percent share of the tractor market, and capture about 20 percent of the combine market, compared with Deere's 45 percent.
Both markets have been seriously depressed since 1983, says Emmett Barker, president of the Farm and Industrial Equipment Institute. If 1984 sales continue the pace set through October, tractor sales will be 0.7 percent and combines 14. 8 percent behind last year - making this the worst year the institute has recorded in at least 20 years, he says.
This is ample reason for gloom. But it also may signal that the decline has just about bottomed out.
''This is about as low as it can go,'' Mr. Barker says. And the Harvester-Tenneco deal, while troubling in one sense, ''is evidence of a significant first step in the restructuring that is going to lead to the reinvention of the farm-machine industry.''
Other observers don't see such a radical shift, but they do acknowledge that farmers are being a lot more careful with their expenses, buying only the size of machinery they think they need.
And there are indications that, like the farm-implement industry, the agriculture sector may also have just about bottomed out. The signs are still small.
There is some indication land values, at least for good agricultural land, have reached a plateau after their recent sharp declines.
And while many farmers are making little or no profit in the turbulent '80s and a percentage of them are staring bankruptcy in the face, others are managing to turn a profit.
That is how, on the same day that Harvester announced it was pulling out of agriculture, Harvester dealer Jim Gast in Joliet, Ill., sold a tractor.
''We've managed to show a fair profit this year,'' says a Deere dealer in Allerton, Ill. ''That's the difference between now and the '30s, when everyone was in the same boat.''