By Bob Tita 

As the farm-equipment industry sputters to the end of its worst sales year since 2009, Deere & Co. will soon provide clues to how much more pain is in store for the coming year.

Deere, the world's largest seller of tractors and harvesting combines, plans to report its fiscal fourth-quarter results on Wednesday. The Illinois-based company is expected to offer a sales outlook that will set the tone for the farm-machinery industry in 2016. Many analysts foresee a big stepdown in Deere's projection that would signal a prolonged slump for the sector.

"We know that 2016 is not going to be an up year. The question is to what extent will the decline continue," said Mircea Dobre, an analyst in Robert W. Baird & Co. "There's a lot to be cautious about when it comes to agriculture and Deere especially."

Deere's stock, which closed Friday at $75.48, has fallen about 15% this year.

Demand for farm equipment has paralleled that for machinery used in mining and oil-and-gas production, which likewise are reeling in a global commodity slump.

Several years of elevated prices for corn, soybeans and wheat fattened the incomes of farmers, who in turn bought more equipment to expand production and improve crop yields. As a result, the farm-machinery industry held up relatively well through the 2008 recession. But weakening demand, combined with bumper harvests, in recent years has pushed down grain prices, throwing a wet blanket over sales of tractors and combines.

Equipment manufacturers and investors alike are plumbing for a bottom to the slump as a precursor to an upturn in sales.

"People will look for some kind of confidence that 2016 is [the bottom], but it's still too early to tell," said Joe O'Dea, an analyst for Vertical Research Partners LLC. "Unit sales volume is still not where it's been in prior down periods."

The number of high-horsepower, two-wheel-drive tractors sold in the U.S. and Canada--a market Deere dominates--are on track to fall about 13% this year to roughly 28,000 tractors, Mr. O'Dea said. While that tally represents about a 25% drop from 2013's peak, it still exceeds a long-term sales average of about 26,000 tractors a year, he said.

During agriculture's last slump in the early 2000s, annual sales of high-horsepower tractors failed to reach 20,000 for years. By this measure, the current market is well off a bottom.

Through the first three quarters of Deere's fiscal year, sales of farm and lawn-equipment sales were off 25% from year-earlier levels, while operating profit from farm machinery fell 54%. For the company's fourth quarter, which ended Oct. 31, analysts expect a similar decline in sales to about $4.5 billion. Overall equipment sales, including construction and forestry machinery, are expected to fall by slightly less, with per-share profit for the quarter contracting by more than two-thirds to 75 cents.

For fiscal 2016, analysts expect Deere's total equipment revenue to fall 7% to $24.4 billion from the $26.3 billion estimated for the past year, according to Thomson Reuters

Deere has throttled back on production to ease the glut of machinery on its dealers' lots and has furloughed assembly workers to lower its costs. The company has a reputation for being able to drive costs of out if operations; but a long slump in sales will make it more difficult to avoid further shrinkage of its margins. Deere's third-quarter operating margin on its farm-equipment business slipped more than four points from the prior year to 8.9% amid a 50% drop in income.

Deere and other equipment manufacturers are hoping to resurrect federal tax incentives that buoyed equipment sales after the 2008 recession. Farmers were allowed to deduct as much as $500,000 from their tax-eligible income taxes for equipment purchases up to $2 million and claim an extra-large depreciation allowance on new equipment. The tax benefits were rolled back at the start of this year after Congress briefly reinstated them late last year for equipment investments in 2014. The equipment deduction is now $25,000.

Supporters of a higher deduction are lobbying Congress and the Obama administration to make $500,000 deduction permanent.

"It's something we're pushing for very aggressively," said Matt Turkstra, senior manager for legislative affairs for the National Federation of Independent Business. "The groundwork has been laid for a deal this year."

The Week Ahead looks at coming corporate events.

Write to Bob Tita at robert.tita@wsj.com

 

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(END) Dow Jones Newswires

November 21, 2015 09:19 ET (14:19 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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