May 31 (Bloomberg) -- Argentine farm machinery sales will drop about 15 percent this year as a slide in commodity prices shrinks farmers' profit, Jorge Medica, president of the Chamber of Producers of Farm Machinery, said.

Sales of harvesters, seeding machines and tractors are expected to fall to about 21,700 units from 25,600 units last year as declining prices and rising fuel costs erode growers' profit margins, Medica said. Equipment makers Deere & Co., Agco Corp., and Claas KgaA mbH forecast lower 2005 sales in Argentina, the world's third-largest soybean producer.

``Last year demand for machinery was exceptional and if commodity prices had remained stable, we would have had a similar year in sales,'' Medica said in a telephone interview in Buenos Aires yesterday.

The cutback in farmers' investment signals agriculture, which contributed about a fifth to Argentina's economic growth last year, will no longer lead the country's recovery from its deepest recession on record, said analysts such as Rodrigo Da Fonseca, an economist with Dresdner Kleinwort Wasserstein in London. Argentine farmers reduced the amount of land planted in soybeans this year by 1 percent even as the government expects a record ton grain crop because of good weather.

Soybean prices fell to $6.83 a bushel today at 10:33 a.m. New York time from a 15-year high of $10.56 a bushel on March 24, 2004 on the Chicago Board of Trade.

``Higher commodity prices last year led farmers to increase consumption of not only machinery but also a chain of goods such as trucks and fertilizers,'' Da Fonseca said. ``Less purchasing power in the farm sector is likely to contribute to slower economic growth due to less demand from other industries.''

About 53 percent of farm machinery sold in Argentina is produced domestically.

U.S. Imports

Agricultural goods accounted for 25 percent of Argentina's total exports in 2004 and as much as 23.5 percent of export duties. The country last year exported $8.9 billion in wheat and soybeans, 11.3 percent more than the $8 billion exported in 2003.

Agriculture is also Argentina's biggest source of foreign currency earnings and reserves, a key to bolstering investor confidence, while commodity exports have helped the government post budget surpluses in the past two years.

Manufacturers such as Moline-Illinois-based Deere, the world's largest maker of farm machines, said South American sales are expected to slump about 40 percent this year, led by declines in Argentina and Brazil where a weaker U.S. dollar, lower commodity prices and rising costs are damping demand.

The Argentine peso strengthened 2.8 percent against the dollar this year, while Brazil's real rose 9.7 percent. Fuel oil prices in Argentina jumped about 20 percent in the last year.

'Engine'

Agco, the world's third largest farm-equipment maker, reported on May 3 that first-quarter profit fell 14 percent because of slow sales in Brazil and Argentina. Operating profit in South America plunged 60 percent as Duluth, Georgia-based Agco cut prices amid shrinking demand.

``Last year, some cattle ranchers dedicated more of their land to grains,'' said Damian Fiorito, manager of foreign trade at Claas, the world's third-largest maker of harvesters.

Claas, which imports equipment from Germany, sold 150 harvesters last year in Argentina, up from 110 in 2003, Fiorito said in an interview in Buenos Aires.

Executives such as Juan Cestari, head of Cestari SRL, a producer of trailers for grains, said the impact of the country's 20 percent tax on exports grows as commodity prices fall, discouraging farmers from making investments.

``Farm production is the engine of the Argentine economy and is a source of wealth for the country and for the world,'' Cestari said. ``The government should encourage farm producers to increase production, instead of fleecing them.''

Tax Revenue

Argentina's tax revenue rose 36 percent last year from 2003 to 98.3 billion pesos. Taxes on exports rose to 10.2 billion pesos from 9.2 billion pesos in the same period.

``Our main problem now is the export duties, which take 20 percent of the farmers' money from their pockets,'' said Rosana Negrini, head of Agrometal SA, a producer of harvesters in an interview.

Agrometal last year invested $3.5 million in a new plant to boost production. ``If we had to invest that today, we couldn't do it,'' she said.

To contact the reporter on this story: Eliana Raszewski at eraszewski@bloomberg.net

Last Updated: May 31, 2005 11:09 EDT