Where the Velvet Begins

Two decades ago Moline Plow Co. had two notable officers. One of them (president) was Farm Economist George Nelson Peek, who in early New Deal days became AAAdministrator, the other was Hugh Samuel Johnson (vice president), who became New Deal's NRAdministrator. Since 1929 Moline Plow Co. has been part of Minneapolis-Moline Power Implement Co. --which has a notable president.

He is husky, smiling Warren Courtland Mac Farlane. In 1933, when Messrs. Peek and Johnson were sowing the seeds of the New Deal, the accident of Depression put Minneapolis-Moline $1,541,000 in the red and a motor accident broke President Mac Farlane's back. Two years later Minneapolis-Moline netted $170,000, and indomitable President Mac Farlane, in his wheel chair, flew 15,000 miles around South America drumming up business. In 1938 Minneapolis-Moline had a profit of $727,000, and President Mac Farlane was riding horses for amusement.

Last week President Mac Farlane issued Minneapolis-Moline's 1939 report (for its year ending Oct. 31). During the year his company's sales dropped 8%, rather a good record since the sales of farm implements generally fell 10 to 15%. While late in 1939 U. S. business volume increased so that many companies passed the point where the velvet begins, Minneapolis-Moline's decline for the year took it back below that point. Its 8% drop in business was accompanied by a 91% drop in profits.

Its earnings were $64,000, just about 10% of the amount needed to pay its preferred dividends. Having passed preferred dividends before, the company now owes $38.98 back dividends on its 98,700 shares of preferred. Well might Mr. Mac Farlane regret that in booming 1937 his recapitalization plan to reduce preferred requirements from $6.50 to $5.50 and buy off preferred claimants fell through because it was not completed before the bull market collapsed.

The problems of Minneapolis-Moline are of a piece with those of the whole farm implement industry. Export business (30% of the sales of International Harvester, No. 1 implement manufacturer) exposes the industry to losses from depreciation in foreign exchange. Against such losses, Minneapolis-Moline prudently charged off $201,197 in 1939's fiscal year.

Furthermore, implement sales are on a long time-payment basis and large amounts of capital are tied up in accounts receivable. Big fellows like International Harvester and John Deere (No. 2 manufacturer) have plenty of capital to tie up in reserves for doubtful notes and accounts. But a company like Minneapolis-Moline has to borrow--a pick-up in its sales from August to October sent the total of its bank loans from $900,000 to $1,500,000. In its year-end statement it had set up a reserve of $927,668 for doubtful notes and accounts.

Competition within the industry is meanwhile remaking the business. Milwaukee's famed electrical machinery producer, Allis-Chalmers, is a sensationally successful factor in the industry. In 1927 Allis-Chalmers' sales of all products totaled $30,593,000 and farm implements made up 7.7% of the total. By 1936 its gross from farm implements alone had topped $33,000,000. Farm implement sales were 2.9% of its earnings in 1927, 66.3% of the net nine years later. Among the reasons for this are that Allis-Chalmers introduced rubber tires on tractors (today 45-60% of all tractors sold are rubber-tired), and pioneered a small (six-foot) combine (harvester) aimed for use on the 2,694,000 U. S. farms of less than 100 acres. (It now has a 42-inch combine.)

In 1935 International Harvester made 32% of all domestically sold combines, Allis-Chalmers only 14%. By 1936 Harvester's share of the combine business had fallen below 12%, Allis-Chalmers' had boomed to over 45%. Reason: as late as 1938 Harvester's cheapest model was selling at $850, Allis-Chalmers' at $625 (last year Allis introduced another at $345). During the 1938 recession (when the rest of the industry raised prices) Allis-Chalmers introduced a $495 tractor, priced $200 under the market, which turned out to be no mean factor in raising it's first-half 1938 farm implement sales 10% over the boom first half of 1937 while competitors were off 20%.

Last summer International Harvester--whose yearly sales of farm implements and trucks in the U. S. average $168,000,000, four times as much as all divisions of Allis-Chalmers--belatedly went out to meet this competition, introduced a new tractor selling at $515. $225 cheaper than any previous International model, only $20 above Allis-Chalmers' small unit. Last week, International Harvester extended its counteroffensive to combines, announced that besides its $725 six-footer, it would now build a four-footer to compete with Allis-Chalmers' $345 42-inch machine. Meanwhile, farm implementing's newest-comer, Henry Ford, stepped up tractor assemblies to 875 a week (price $585), still failed to catch up with orders.

Minneapolis-Moline in meeting this growing competition has produced a "Comfortractor." Its driver sits on upholstery in a cab heated, fitted with radio, dustproof, cooled by an electric fan--the answer to a clod-buster's prayer for release from boredom, sweat and cornfield dirt.

Competition in the industry has speeded the replacement of horses and mules by power. On January 1, 1939, there were 15,300,000 horses and mules on the 6,000,000-odd U. S. farms, almost 2,000,000 less than in 1930. What replaced them were chiefly tractors and trucks.

Question is whether the healthy competition started by Allis-Chalmers has taught U. S. farm implement companies their lesson. Barely two years ago the industry greeted Depression II with a 4-5% price rise. So catastrophic was the kickback that, later in 1938, the increase was given back, prices on heavy machinery were slashed up to 12%. With dollar-plus wheat and 72-c- corn, the industry has not guaranteed its customers against a price rise in 1940. It always prefers rosy spectacles.

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