Deere has leverage in labor talks, experts say

A dramatic tail-off from record profits a couple of years ago for Deere & Co., Iowa's iconic equipment manufacturer, could set the stage for prolonged, and potentially contentious, labor negotiations once the current 6-year contract expires Thursday, economists and analysts say.

Talks are underway between Deere and United Auto Workers to hammer out a new labor contract covering 10,000 workers, most of whom make farm and construction equipment in Iowa and Illinois.

But those talks take place against a backdrop of weakening farm and construction markets that may afford leverage to the giant Moline, Ill.-based equipment manufacturer.

"I don’t think the current contract reflects four straight years of revenue increases and high profits," said Peter Orazem, an Iowa State University labor economist. "So workers are now saying: 'It’s time for us to get our share.' But Deere management likely feels the climate going forward is going to be much more difficult."

Experts say the union likely would agree to continue working under the existing contract until a deal is reached.

Many believe Deere has little incentive to forge a deal that pays employees more to produce the iconic green machines for an already saturated market.

And that raises the specter of a possible strike, something that hasn't happened to Deere since 1986, when workers sat out 163 days.

Deere's upper hand

The struggling farm economy has slowed demand for the company's equipment, which includes products ranging from tractors and combines to construction skidloaders and bulldozers.

It marks a sharp change from just a few years ago when record-high corn and soybean prices resulted in Deere and other farm equipment leaving dealer lots as fast as it arrived.

“I would say Deere has the upper hand on bargaining right now, just from the standpoint that they are really over-inventoried right now,” said Kwame Webb, an equity analyst with Morningstar. "If there was a strike, I’d be surprised to see them rushing to get people back to the production lines."

Deere posted record earnings from 2010 to 2013, when profits climbed to a $3.54 billion high. But corporate profits have tumbled since, falling 11 percent in 2014 and projected to drop another 43 percent this year.

The company has responded by laying off about 1,500 workers in Iowa and Illinois since last year.

Deere and UAW leaders have agreed to make no public statements, unless jointly released, during ongoing negotiations that began in August.

Deere has to be “fairly firm in this negotiation, given the concerns they have about their business right now," said Chad Hart, an Iowa State University agricultural economist. "They can’t make a bad deal just to avoid a strike.

"They recognize that they are having to watch their bottom-line hard right now, and that probably limits just how much movement they are willing to give to avoid a labor stoppage here."

Prospects for a strike

A strike at more than a half-dozen cities in Iowa and Illinois, including Ankeny, Cedar Falls-Waterloo, Dubuque and the Quad Cities, would be a blow to local economies, especially if it were extended, say economists.

But the hit to the state's overall economy likely wouldn't be serious, given its strength and diversity.

The 1986 Deere strike was near the end of the Farm Crisis that pushed hundreds of Iowa families from their farms.

The nearly 5½-month strike was bitter and painful, said Fred Abraham, who leads the University of Northern Iowa's economics and finance departments.

Deere slashed its workforce 43 percent by the end of that year, from a high in 1979 of 65,392.

"What we don’t want to happen is for them to get into a big fight and have a prolonged strike that winds up hurting both sides and the community," Abraham said.

"Even with strike funds, it hurts the pocketbook of workers," he said. "You start missing a paycheck, things get tight in a hurry."

Orazem and others believe a strike is unlikely, given a mostly positive relationship between the union and the corporation.

"Maybe there’s a 10 percent chance of a strike," he said.

Prospects for a deal

More likely, Hart and other experts predict, are lengthy negotiations.

Pay, benefits and job security are likely on the table, as well as an unpopular two-tiered pay scale that gives new workers substantially less pay and benefits than those hired before Oct. 1, 1997.

Deere has no pressure to settle the contract quickly, Hart said, nor "make some very strong concessions to the union just because right now business is not strong."

Deere has "already had to go through a few rounds of layoffs, so they probably just don’t feel they have the financial standing to really make concessions to make this go away," Hart said. "It could be in their best interest to allow things to play out for a while.”

And the union has no pressure to make concessions either, given profits Deere amassed during the farming boom, Hart said.

"They see that they didn’t, if you will, get enough of the share of those gains when things were so good, so they are looking for some of that to be back-filled through these negotiations," he said. "I see two camps that are entrenched here for a while.”

Falling farm profits

Many farmers are expected to operate at a loss this year and in 2016, especially with another near-record crop being harvested this fall.

U.S. farm income is expected to drop in 2015 to $58.3 billion, falling from $91.1 billion a year ago, according to the U.S. Agriculture Department.

If the USDA’s latest estimate turns out to be accurate, it would mark a 36 percent decline in net farm income from 2014 to 2015 — the largest drop since 1983. That year, the farm economy was reeling from its worst downturn since the Great Depression, as crop prices fell and interest rates soared.

Corn prices are now less than $3.90 a bushel, compared with an average of $7 in 2012. Soybeans have dipped below $9 a bushel vs. $14.40 three years ago, when much of the Corn Belt was mired in a drought.

Webb, the Morningstar analyst who follows Deere, Caterpillar and other heavy equipment manufacturers, said he expected any gains the union gets from the current round of talks to “be very modest at best.”

One potential solution between the two sides that could emerge is a sliding-scale where employees see their pay rise as company profits improve, allowing them to share in improving profits at Deere, he said.

Weak world markets

Global economic weakness is reducing demand for both large farm and construction equipment, particularly in China and Europe.

Competitor Caterpillar announced last week it will restructure its construction and mining business, cutting 10,000 workers and shuttering 8 million square feet of manufacturing space. The Peoria, Ill.-based company wants to cut expenses by $1.5 billion annually.

Rick Hawbaker, manager for Van Wall Equipment in Nevada, Iowa, which distributes Deere machinery, said agricultural equipment sales are down 30 percent over the past year. Producers have been especially reluctant to purchase machines topping $150,000.

A Deere strike could affect Van Wall's parts and repairs business because of longer waits to ship and receive replacement parts, Hawbaker said. Repairs have been strong, as more farmers bring in equipment to be fixed, he said.

“We got a couple years to wade through some high-priced items, I’m afraid. There is plenty of new equipment yet to sell,” Hawbaker said. “If it was two, three years ago it would have had a way more dire effect, because we were waiting on sold orders to even get shipped.”