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Deere & Co cuts profit outlook again

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The Illinois-based machinery and agricultural equipment manufacturer could not escape weak commodity market conditions, cutting reported earnings and flagging a lower profit guidance.

This morning, the world's biggest agricultural equipment manufacturer announced second quarter earnings of $495m and better than expected sales. Although above consensus forecasts, investors voted with their feet; the share price was sold off from the get-go.

In late-morning shares in the ubiquitous tractor manufacturer were trading at $78.05, down $4.25 (5.17%) from last night's close.

Investors shrug off better than expected results

The outlook for the company had been worse, a lot of the results came in at or above where the street had projected. Deere & Co booked second quarter sales of $7.875bln, exceeding consensus expectations of $6.71bln.

Earnings per share (EPS) were reported at $1.56 in the quarter, which again exceeded expectations of $1.48

However, full year net profit was pegged at $1.2bln, which was slightly lower than expectations of $1.3bln.

Looking ahead, the company forecasted full-year equipment sales to be lower by 9%, which was slightly higher than previous guidance.

Global farm recession

In the report, the company explained "the decline, reflecting the impact of low commodity price and stagnant farm incomes" as producers reign in capital expenditure as a response to lower earnings.

The report flagged weakness abroad as well. Indeed, Deere & Co spokesman Joshua Jepsen, pointed out risks to growth globally, stating " John Deere's performance for the second quarter reflected the continuing impact of the downturn in the global farm economy", with lower industry sales tipped for many regions from China, India though to the European Union.

Overall Deere's worldwide sales were forecasted to drop 8% for fiscal year 2016. In South America, in particular, sales of tractors and combines were tipped to fall 15 – 20%, the stronger US dollar a headwind for the business there.

Tough road ahead

Despite the clearly challenging conditions, shares in Deere & Co have risen roughly 8% since the start of the year on hopes that the company had endured the worst of the commodity cycle.

The company had reacted quickly to the challenging trading conditions by cutting back jobs and targeting eliminating costs as their earnings deteriorate.

However, looking ahead the company still sees risks to the agricultural industry. In today's report Deere & Co forecasted third quarter net sales to be down 12% relative to the corresponding period of 2015.

Farmer profitability key to Deere & Co outlook

Put simply, Deere & Co needs producers to make money to spur investment into new machinery. The company will be buoyed by recent rebound in prices for many key agricultural commodities.

Deere & Co forecast soybean prices for the 2016/17 marketing year to average $9.10 per bushel. In today's trade the new crop Nov-16 soybean contract was trading at $10.46 per bushel. Current prices for corn and wheat were also comfortably over budgeted figures.

We are too early to tell if we are at the bottom of the cycle, but there is certainly a silver lining to today's sombre results.


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