Deere & Co. (IW 500/37), the world’s biggest agricultural equipment manufacturer, cut its fiscal full-year earnings outlook as lower commodity prices hurt farmers’ income and a glut of unsold machinery continues to pile up at dealerships.
Full-year net profit will be about $1.2 billion in the year through October, Moline, Ill.-based Deere said in a statement Friday, compared with the $1.3 billion it forecast in February.
Industrywide sales of agricultural equipment in the U.S. and Canada will drop as much as 20% this year, Deere said. It described market conditions as "challenging" and added that it sees further weakness in the construction industry, a sector that Deere also serves. The company has battled the downturn by eliminating jobs and cutting production, and said it’s still looking at ways to cut more costs.
Corn and soybean prices have fallen for the past three years, and the U.S. Department of Agriculture predicts farm net income sliding this year to the lowest level since 2002. However, a recent rebound in those commodities may give some farmers enough confidence to start buying machinery again as this year’s U.S. growing season starts up. Soybean futures traded in Chicago entered a bull market last month as heavy rains flooded fields in Argentina, among the world’s top exporters.
There was some slightly more positive news in Deere’s earnings: full-year equipment sales are now projected to decline about 9%, instead of an earlier forecast for a drop of about 10%. The company also posted better-than-expected second-quarter earnings.
“If people are comfortable with the thesis that we’re nearing a bottom, I don’t think there’s anything here to dissuade them,” Stephen Volkmann, a New York-based analyst at Jefferies Group LLC, said by phone, referring to Deere’s report. “There’s a little something here for everybody.”
If people are comfortable with the thesis that we’re nearing a bottom, I don’t think there’s anything here to dissuade them."
— Stephen Volkmann, analyst, Jefferies Group LLC
Profit excluding one-time items was $1.56 a share in the three months through April, beating the $1.47 average of 19 estimates compiled by Bloomberg. Equipment revenue dropped to $7.11 billion from $7.4 billion a year earlier. Deere said it expects third-quarter machinery sales to be about 12% lower than in the same period a year ago.
Deere expects soybeans to average $9.10 a bushel for the 2016-2017 marketing year, up about 2.8% from its estimate for the prior year, it said in slides on its website.
"With agricultural commodity pricing at these levels, I could see that giving them some light," Kwame Webb, an analyst at Morningstar Inc. in Chicago, said by phone Thursday. "Most of the ag commodities have taken a step up. Everyone wants to know what that means for order boards in North America."
By Mario Parker