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Deere cuts profits outlook as crop price dips bite

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Deere & Co joined the farm operators cutting profit forecasts, citing "moderating conditions" in the farm sector thanks to lower crop prices, with prospects retreating particularly in the North and South American markets.

The maker of John Deere machinery again cut its sales forecast for its full financial year, which ends in October, foreseeing a 6% decline in takings, compared with a previous estimate of a 4% drop.

And this time, it reduced its forecast for full-year profits too, to about $3.1bn, from a previous estimate of $3.3bn.

"Earnings are forecast to be somewhat lower than in 2013," said Deere, which has not since 2009 reported a drop in full-year profits.

'Reduction in farm income'

The group blamed the downgrade on the dent to growers' profitability prospects from lower crop values.

"Although the agricultural economy remains in a relatively healthy state, falling commodity prices are contributing to a reduction in farm income," Deere said.

The group reduced by $6.4bn to $108.3bn its forecast for US net farm cash income in 2014 – a drop of $17.3bn year on year.

"The decline is putting pressure on demand for farm equipment, especially larger models," with orders for smaller machinery being support somewhat by the boost to livestock sector prosperity from lower feed costs.

'Strong headwinds persist'

The group revised to 10%, from 5-10%, its forecast for the drop in industry-wide farm machinery sales in Canada and the US, and to 15%, from 10%, the decline expected in South America.

For the former Soviet Union it kept an expectation of a "significant" drop in industry sales, while highlighting that market conditions there "have deteriorated".

"Strong headwinds persist" in the region, Deere said, noting declining economic growth, and a "further tightening" in credit availability for farmers, while also highlighting that "geopolitical uncertainty impacting Western manufacturers".

One of the main Deere dealers in Russia, Ekotechnika, has reported widening losses.

For Europe, Deere, noting "sound margins" for livestock farmers, stuck with a forecast of a 5% drop in industry sales.

'Moderating conditions'

The comments came as Deere unveiled a 14.6% drop to $850.7m in earnings for the May-to-July period, equivalent to $2.33 per share, a little above Wall Street expectations for a $2.22-per-share result.

Revenues dropped 6.0% to $9.50bn as a decline of 11.2% in agriculture sales more than offset the boost from a 19.4% rise in takings at the smaller construction division.

"Deere's third-quarter performance reflected moderating conditions in the global farm sector, which have negatively affected demand for farm machinery and contributed to lower sales and profits for our agricultural-equipment business," said Samuel Allen, the Deere chairman and chief executive.

"At the same time, our construction and forestry and financial services divisions had higher profit, showing the benefit of a broad-based business line-up."

Factory cutbacks

The group, echoing rival Agco, the maker of Fendt and Massey Ferguson equipment, said that it was reducing production of farm machinery "in line with demand".

"These actions illustrate our commitment to responding with speed and decisiveness to changes in market conditions," Mr Allen said.

With quarterly earnings ahead of forecasts, and Wall Street having already being sceptical that Deere would reach its previous $3.3bn annual profits estimate, shares in the group suffered minimal losses in early deals in New York, standing down 0.3% at $86.20.

Other farm machinery groups cautioning over decreasing demand include irrigators maker Lindsay Corp and satellite technology group AgJunction.

By Agrimoney.com

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