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People shorting DEERE for opening plant in Russia?

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April 27, 2010 – Comments (1) | RELATED TICKERS: DE , CAT

* Opens new manufacturing plant near Moscow

* Exploring ways to supply credit to Russian farmers

* May open more Russian plants in future

* Sees 60 percent sales outside North America in 10 years

 

(Adds details, quotes)

By Robin Paxton

DOMODEDOVO, Russia, April 27 (Reuters) - Deere & Co, the world's largest farm equipment maker, is on track to spend $500 million building new plants in Russia and offering credit lines and other services to farmers within the next six years.

Deere Chairman and Chief Executive Samuel Allen said on Tuesday that Russia, the European Union, South America and Asia would grab a larger share of the company's business over the next decade as global agricultural output rises to meet demand.

"Today, approximately 60 percent of our revenues in an average year comes from the U.S. and Canada. Forty percent is everywhere else," Allen told Reuters in an interview.

"If you were to fast-forward 10 years, I think that will reverse: 60 percent will be outside the U.S. and Canada."

Allen was speaking at the launch of Deere's single largest investment in Russia, a manufacturing and parts distribution plant in Domodedovo, 50 km (31 miles) south of the Kremlin and close to Moscow's largest international airport.

The plant, which expects to employ 300 people when working at full capacity, cost "less than half" of the $500 million that Deere last year pledged to invest in Russia, Allen said.

Russia, with 9 percent of the world's arable land, is already among the world's largest wheat exporters and plans to double grain exports within 15 years, thus boosting Kremlin influence in delivering food to the world's growing population.

"We fundamentally believe that, by 2050, agricultural output will have to double in the world to feed 3 billion to 3.5 billion extra people," Allen said. "We cannot meet the demands of the world without Russia's agriculture expanding greatly."

Deere unveiled its plant's first vehicle in a cloud of dry ice in front of several hundred visitors. The 430 horsepower articulated tractor, with wheels taller than the executives who filed past, would retail at around $200,000, Allen said.

The Moline, Illinois-based company has a $23 billion worldwide credit portfolio, employed mostly in North America, and is exploring ways to become a lender to Russian farmers.

"Getting stable access to credit in Russia is key to having a sustainable equipment market and we are pursuing the options, talking to banks and the government," Allen said.

 

100-YEAR HISTORY

Deere, founded in 1837, made its first Russian sale exactly 100 years ago, a consignment of 900 ploughs to the Pacific city of Vladivostok. By 1930, the company was receiving 10 percent of its revenues from Russia.

In 2008 -- Deere's best-ever year for sales in Russia -- the country accounted for 5 percent of overall revenues. The share dropped to less than 1 percent in last year's crisis-hit market.

"Getting back to 10 percent of total revenues would be a good near-term objective," said Allen, a native of South Carolina who has worked for Deere since graduating 35 years ago.

The company already operates a network of 70 dealers across Russia, as well as a seeding plant in the city of Orenburg and a planned training centre in Kaluga, southwest of Moscow.

"Down the road, we think that would be a good location for another plant when the market continues to develop," Allen said. "As volumes pick up, we'll localise more of the production."

Allen said Russia had "tremendous potential" to raise output by bringing 20 million to 30 million hectares of idle land -- an area approximately the size of Britain -- back into production.

"Farm sizes are even larger here on average than in the U.S., and that's good for high-production agriculture," he said.

"The challenge is a combination of stable liquidity, access to credit, and stability in the rule of law that makes you much more comfortable with investing and supporting farmers."

He said Russia would also benefit from applying better farming methods to increase yields.

"There are pockets today that are best practice, but there are a lot of places where yields are half of what they would be on a comparable farm in another part of the world."

Allen said it was unlikely Deere would attempt any large acquisitions in the construction equipment business as it was growing this sector through joint ventures in India and China.

He said more stable commodity prices -- meaning farmers can better plan investments -- were key to agricultural growth.

"We need more sustainable commodity prices. We don't need to have the real high highs; we just can't have the real low lows.

"There's a good chance this will happen over the next few decades because of the overall population increase and the prosperity that will return once we get out of this recession."

1 Comments – Post Your Own

#1) On April 27, 2010 at 12:53 PM, lemoneater (79.19) wrote:

Very interesting. Expanding in a country with a large arable land mass sounds fantastic, but since IKEA and other companies have experienced major losses when they tried to expand in Russia, I wonder how this will work. Unfortunately the government there does not always seem to provide a safe nurturing environment for foreign business no matter how it would benefit the people and the economy. I wonder what zloj thinks since I consider that he has a unique inside perspective on the Russian government/business world based on his blog topics. 

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