www.ubs.com/investmentresearch This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Global Research 16 January 2019 Agricultural Machinery The Future of Farming: How will technology disrupt the value chain? Farming will be markedly different in the future – can farmer profits improve? We think the future of farming will be markedly different than it was historically and it is today. Farm consolidation, demographics, technology, data, sustainability, changing trade and grain supply/demand patterns, supply chain, asset utilization, and services, will present long term opportunities and challenges. Can farmers navigate structural changes in the farming industry to become more profitable going forward? In short, market share for farmers and the supply chain is at stake. We will address these and other topics in this series of reports called The Future of Farming. Major implications for the supply chain – but more questions than answers While growers and producers will face the dynamics noted above, the supply chain will also have to react to these market changes. With structural industry change, we expect that business models and value add will look very different than they do today. Can the traditional supply chain stay ahead of the disruption and disruptors? Who will be the winners and who will be the losers? Are incumbents' businesses models at risk? FoF Part 1: Farmers - sustainable profitability is key; suppliers need to innovate In this first report, we look at an overview of farm profitability in the US, and highlight some of the aspects of profitability that farmers will manage differently in the future, specifically, marketing techniques, technology adoption, extra focus on yield, diversification of growing and broader operations, and outsourcing. If incumbents in the chain are not able to innovate, to help farmers address profitability, we expect disruptors will displace incumbents. For machinery providers, to input providers, to service providers, there is a virtuous cycle of farm profits supporting profits to the supply chain, which in turn can invest to provide better returns for farmers. Machinery providers impacted The question for machinery companies is whether they can keep ahead of disruptive companies. Can they effectively develop and market technology to drive profitability by farmers? Can they adapt their business model to be less product and volume centric, and to be more service oriented? We see implications for Deere, CNH, and AGCO. At the moment, we believe Deere is best positioned to address these changing dynamics for the large ag sector. Equities Americas Heavy Machinery Steven Fisher, CFA Analyst steven.fisher@ubs.com +1-212-713 8634 Erika Jackson Associate Analyst erika.jackson@ubs.com +1-212-713 1426 Nicholas Amicucci Associate Analyst nicholas.amicucci@ubs.com +1-212-882 5036 Hikaru Mizuno Analyst hikaru.mizuno@ubs.com +81-3-5208 6207 Agricultural Machinery 16 January 2019 2 Contents Overview .......................................................................................... 3 Why is farm profitability important? ............................................. 6 What is driving farm profitability today? ...................................... 7 Income Drivers ............................................................................................. 8 Expense Drivers .......................................................................................... 10 Early indications for 2019 expenses ........................................................... 10 What will be different about profitability in the future? ........... 12 Diversification ............................................................................................ 12 Outsourcing ............................................................................................... 15 Technology ................................................................................................ 12 Steven Fisher, CFA Analyst steven.fisher@ubs.com +1-212-713 8634 Erika Jackson Associate Analyst erika.jackson@ubs.com +1-212-713 1426 Nicholas Amicucci Associate Analyst nicholas.amicucci@ubs.com +1-212-882 5036 Hikaru Mizuno Analyst hikaru.mizuno@ubs.com +81-3-5208 6207 Agricultural Machinery 16 January 2019 3 Overview Farming will be markedly different in the future – can farmer profits improve? We think the future of farming will be markedly different than it was historically and it is today. Farm consolidation, demographics, technology, data, sustainability, changing trade and grain supply/demand patterns, supply chain, asset utilizati...
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