(Bloomberg) -- U.S. tractor maker AGCO Corp. beat earnings expectations by expanding margins. But its outlook for the agriculture economy in North America points to significant challenges ahead.
The Duluth, Georgia-based company reported quarterly profit that exceeded the highest analyst estimate and raised its full-year outlook. AGCO secured lower material costs and higher prices for its equipment, Chief Executive Officer Martin Richenhagen said in a statement Tuesday.
All that in an agriculture environment that’s been dogged by trade wars and unfriendly weather, and the way AGCO sees it, the challenges are going to continue.
Market demand is trending down amid forecasts for a smaller 2019 harvest in North America, prompting the company to lower its production schedule. Retail sales in the region shrank in the first half, and sales for the year will be “relatively flat,” Richenhagen said.
Some in the industry expected South America to offset North American declines as it wins market share due to the U.S.’ trade war with China. But industry retail sales in South America decreased during the first half of 2019. While Brazil and Argentina saw bigger grain production, there were interruptions in the government-subsidized finance program in Brazil and weak macro-economic conditions in Argentina, Richenhagen said.
Still, shrinking North American grain output and inventories could be positive for global farm income in the future. Insurance and other government payments will give equipment makers like AGCO and its larger rival Deere & Co. a chance to sell out old inventory at higher prices, Jefferies analyst Stephen Volkmann wrote in a June report. Deere reports quarterly earnings next month.
AGCO shares, up 37% this year, gained less than 1% before the start of regular trading on Tuesday.
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