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Deere staves off worst of ag equipment downturn

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Deere & Co unveiled a better-than-forecast finish to its 2015 financial year, and raised hopes for 2016 too, despite expectations of a continued decline in the world farm equipment market, particularly in the Americas.

Shares in the group soared 5.4% to $80.48 in opening deals in New York, adding more than $1.3bn to its stockmarket value.

The maker of John Deere machinery reported earnings for the August-to-October period of $351.2m – a drop of 46% year on year.

However, the decline in earnings, to the equivalent of $1.08 per share, was less than expected by investors, who had pencilled in a $0.75-per-share result.

Deere's revenues for the quarter, while down 25% at $6.72bn, were comfortably ahead of forecasts of a 32% drop, helped by a relatively resilient performance in financial services, with profits also helped by cost cuts and a boost from a lower tax rate.

"Sales and earnings for the year were the sixth-highest in company history, a notable achievement in light of the challenging market conditions we experienced," Samuel Allen, the Deere chairman and chief executive, said.

Outlook for 2016

For the year which started this month, Deere forecast that equipment sales would decline a further 7%, implying a figure of about $24bn, the lowest in at least five years.

And earnings will come in at "about" $1.4bn, implying a decline of some 28% year on year to a four-year low.

However, this is ahead of the figure of $1.31bn that Wall Street has forecast.

"Although our forecast calls for lower results in the year ahead, the outlook represents a level of performance that is considerably better than we have experienced in previous downturns," Mr Allen said.

'Stagnant farm incomes'

The forecast of a 7% decline in earnings over the next year factored in some stabilisation in the European Union farm machinery market, following shrinkage of about 10% over Deere's 2015 financial year.

"Full-year 2016 industry sales in the EU are forecast to be flat to down 5%," the group said, flagging pressure from "low commodity prices and farm incomes".

However, the South American market will decline by 10-15%, "mainly as a result of economic concerns in Brazil and uncertainty about government-sponsored financing".

And in Canada and the US, industry sales are expected to drop by 15-20%, in a decline "which reflects the impact of low commodity prices and stagnant farm incomes, [and] is expected to be most pronounced in the sale of higher-horsepower models".

More powerful tractors are used in the main by arable farmers, whose incomes have been particularly hard hit thanks to lower crop prices.

Ag price hit

Indeed, Deere's assessment follows a downgrade of $2.4bn to $55.9bn in the US Department of Agriculture's estimate for US farm incomes this year, thanks to lower agricultural commodity prices.

That would be the weakest figure in 13 years and, in representing a 38% decline year on year, the biggest drop in earnings since 1983.

Deere shares eased from early highs to stand at $78.81, a rise of 3.2% on the day.

By Mike Verdin

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