Deere Underperforms, But Remains Optimistic

Deere & Company's 2010 result in Russia will be similar to 2009's dismal showing, when it was hit by the credit crunch and changes to lending rules, its chief executive said.

"Last year was the worst year we've had in a long time in Russia," Samuel Allen said in an interview at the St. Petersburg economic forum. "And this year is going to be similar, and the No. 1 factor there is not the health of the farmer … it's the access to financing."

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.

Despite current weakness, Deere sees great potential in the Russian market, where it has pledged to invest $500 million in the next five to seven years.

Allen said that last year Russian officials raised import duties and barred agricultural lenders from financing imported machinery purchases.

"The government came in a year ago and took away the ability of the large ag [agriculture] banks to finance foreign-produced products, which is one of the reasons why we had to really move quickly on Domodedovo," the executive said, referring to a new plant outside the Russian capital.

Deere has invested about $120 million there, meaning that it can invest about $380 million more in Russia according to its expenditure plans.

The plant, which opened in April, will supply locally made tractors, construction and agricultural equipment and other machines to the Russian market.

The government should not favor short-term tariffs that give preference to local producers, or push the use of domestic suppliers, he said.

“We’re willing to gamble on the economic environment,” Allen said. “The amount of localization should be driven by market forces, not percentages, and we are committed to finding local suppliers.”

Allen said Deere expects to play an important role in Russia's efforts to boost agriculture output following a sharp decline in the post-Soviet period.

"They've got about 25 million to 30 million hectares of additional arable land. … It was taken out of production since the '80s," he said.

He cautioned, however, that infrastructure upgrades as well as improved agricultural practices must be in place for Russia to reach its goals.

"You could argue that Russia could probably double total agricultural output by just adopting best practices from around the world," 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 the Kremlin's influence in delivering food to the world's growing population.

It remains Deere's primary focus for investment in the former Soviet Union, though Allen said neighboring states had approached his company about setting up plants in their countries.

"We are being encouraged by other governments to also localize, but in the CIS markets, Russia is where we have our investments at this time," Allen said.

He also said it was too early to say how recent fiscal woes in Greece and Hungary would affect demand for Deere products.

"You want to always plan for the worst and hope for the best, so our scenario plans go around saying what if this gets a lot worse," Allen said. "To some degree, because it probably would impact credit markets, it would have an impact on our business anywhere in the world."

(Reuters, Bloomberg)