We visited Deere’s sugar cane harvester and sprayer factory in Catalao in the state of Goias. This factory employs 795 people, including 656 in manufacturing and 139 salaried workers, along with another 150 contracted workers. This factory was constructed by Cameco of Brazil in 1998 to make sugar cane harvesters, and did not officially become a wholly owned Deere factory until 2002 when Deere bought out the business. In 2012 Deere localized its sprayer production into this factory. There is some logic to the seasonality of the production schedules. Deere also makes sugar cane harvesters and application equipment in the United States. The products are similar, which allows for benchmarking and problem solving. Deere makes three variations of sugar cane harvesters (3,522 track and 3,520 wheeled) and two variations of sprayers (600 gallon capacity and 800 gallon capacity). Catalao is also responsible for importing Deere products and reinvoicing, which is not done through this facility for tax reasons, and because of the location and proximity to large farms in the Cerrado. A typical large deal with a larger Cerrado farmer might be $15 million to $20 million. Deere is expanding this site by about 30%.
We received additional color from management on the following. In the United States, the agriculture risk coverage (ARC) crop insurance program stands to be the most likely program to be used at this point, though there is still a lot of confusion. Visibility, in general, is not great because some farmers are still waiting to see how the market develops. China is the region with the least visibility. As far as Russia, Deere’s net exposure is manageable. Deere believes that while industry inventory in North America and Brazil is elevated, its dealer inventory is in the best shape relative to competitors. Localization of products to fit the market has been an ongoing story for Deere and has helped the company gain share and increase revenue in recent years. Over the next 5 to 10 years, we believe that more localization will occur on the construction side than in the agriculture side where the portfolio is broader.
The primary driver for sugar cane is energy. Sugar cane has aggressively been mechanizing the past 10 years for planting and harvesting because of labor shortages and environmental pressure. Planting of cane has gone from 5% mechanization in 2004 to 59% in 2014, and is estimated to hit 90% by 2020. Harvesting was 13% mechanized in 2004 but reached 88% in 2014 and is estimated to hit 90% by 2020. The top six sugar cane growers control 30% of production. The average age of equipment is about 4 years old and 2011 represented the peak in industry sales. It is logical that a replacement cycle could occur in the next few years, but growth from further mechanization will not be a driver given the levels of mechanization now. The annual Brazilian market is about 1,000 to 1,200 units and there is probably another 500 units of potential demand in Latin America beyond Brazil. Harvesters can cost around $400,000 and generate another $100,000 a year in parts and service sales through the dealer. They harvest about 1 hectare an hour and most growers harvest 80 to 100 tons per hour, which is very intense.