Tariffs Impede Tractor Manufacturer's Growth in US Market

Agco, a tractor manufacturer, faces stiff competition in the US market due to a wave of new tariffs. The company has limited US sales and cannot justify moving more production out of Europe. Tariff costs may lead to price hikes, further depressing sluggish demand for farm equipment in the US. Agco continues to invest in the US despite these challenges.

Agco, a leading tractor manufacturer, is facing stiff competition in the U.S. market due to a wave of new tariffs. The company, which holds the No. 3 spot in the essentially three-company farm-equipment market, is grappling with the impact of these tariffs on its business operations and sales growth.

The Duluth, Ga.-based company has limited U.S. sales and cannot justify moving more production out of Europe, where it has most of its production and sales. Chief Financial Officer Damon Audia stated that the company doesn't have enough U.S. sales to make such a move. However, the likely need to raise prices to offset tariff costs could further depress sluggish demand for farm equipment in the U.S., where Agco is continuing to invest.

In Europe, where much of its supply chain and sales are aligned, Agco could see a boost by avoiding many tariff costs that its peers Deere & Co. and CNH Industrial face. Agco is evaluating whether to shift its supply sources, potentially moving from suppliers in Europe to ones in the U.S., or from Western Europe to Eastern Europe. The company is also looking to push its suppliers to be more efficient with their operations to limit the tariff cost they pass onto Agco.

While these measures won't eliminate tariff costs entirely, making price increases necessary, Agco is exploring options to mitigate their impact. For instance, the company might spread out price increases across its brands, charging more for planters and sprayers made in the U.S. so it wouldn't have to raise prices as much on tractors from Germany. No decision has been made on this yet.

Agco makes tractors, combines, retrofit kits, and replacement parts, with about 35% of its $2.85 billion in North American sales in 2024 coming from imported products, largely from Europe. Europe represented about 60% of the company’s $11.66 billion revenue in 2024. Agco is most exposed to U.S. tariffs on European Union goods.

The company's shares are up about 26% over the last 12 months on the New York Stock Exchange, driven by growing interest in precision agriculture and sustainable technologies. Agco booked $314.8 million in net income for the latest quarter ended June 30, compared with a net loss of $367.1 million a year earlier.

Agco's U.S. revenue growth could be weakened by price increases made in response to tariffs, however. Tariff costs make it harder for Agco to expand its sales in the U.S., where it has a small market share, compared with its market share in Europe and Brazil. Stephen Volkmann, a managing director at Jefferies, noted that if the goal is to increase U.S. manufacturing, making it harder for companies to do so seems counterproductive.

Agco is focusing on strategic transformation, including forming a joint venture with Trimble TRMB to form PTx Trimble, which facilitates its rapid growth in technology transformation and provides seamlessly compatible, powerfully simple precision ag solutions. The company also announced the sale of the majority of its Grain & Protein business to American Industrial Partners for $700 million, which will be used for debt repayment, disciplined investment in technology, and capital return to shareholders.

Despite these challenges, Agco remains committed to its growth strategy in the U.S. market. The company's North American sales fell by 24% to $2.85 billion in 2024, but it continues to invest in the market. Agco's North American Fendt sales have more than doubled since 2020, but the market share remains low. The company aims to expand its market share in combines and larger tractors, potentially through the higher sales of its German tractor brand Fendt.

Agco's stock has gained 29.1% in the past year compared to the industry's growth of 30.7%. The company currently sports a Zacks Rank #1 (Strong Buy), indicating strong investment potential.

References:
[1] https://www.wsj.com/articles/for-this-tractor-manufacturer-tariffs-are-making-competition-even-stiffer-6a913e22
[2] https://www.nasdaq.com/articles/agco-gains-precision-ag-business-demand-cost-control-efforts