Deere forecasts 4 percent sales drop after harsh winter and low corn prices

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Deere & Co. faces a challenge it’s not used to this year: selling its products as corn prices remain low, crimping farmers’ profits and their willingness to purchase new equipment. Net sales and revenues dropped in the second quarter to $9.95 billion, down 9 percent from $10.91 billion in the year-ago period. The company forecasted a 4 percent decline in sales for the third quarter and  fiscal 2014.

The biggest maker of farm equipment Wednesday reported a 10 percent drop in its second-quarter earnings to $981 million, or $2.65 per diluted share, from $1.08 billion, or $2.76 per diluted share, a year ago. While the decline in earnings weighed on the company’s stock price, the drop still beat Wall Street expectations of $2.47 per share.

Deere is most notable for its dominant market share in small tractors. The Moline, Ill.-based company relies most on farmer’s purchasing decisions, and this year many of those farmers will have much less cash coming in for their crops.

Deere’s biggest challenge this year is maintaining market share, which Deere has continued to dominate in the agricultural manufacturing sector, said Dennis Guettinger, manager of the Moscow, Idaho, branch of Pape Machinery Inc. Pape Machinery is a West Coast dealer that sells Deere & Co. equipment.

“John Deere is expecting a little bit of a soft year,” Guettinger said in March. “There’s always a little bit of a dip in the grass. Every business doesn’t just take off.”

Lower earnings in the second quarter is what the company expected, as harsh winter weather and lower corn prices affected farmers’ bottom line.

But the company still forecasts a 10 percent increase in net sales this year compared with 2013 and expects to end the year with $4 billion of cash flow. Deere spokeswoman Susan Karlix remains optimistic.

“It was another solid performance,” Karlix said. “The company again demonstrated a depth execution of its operating plans, keeping costs and assets under control while successfully managing major new product transitions.”

Corn prices dropped to a staggering $4.30 per bushel in the second half of 2013 compared with prices that went as high as $8 per bushel in 2012.  An exceptionally wet season and surplus of supply from 2013 make commodity traders pessimistic about where corn prices are heading. Corn futures for July delivery closed Wednesday at $4.95 1/2 per bushel.

Deere expects its bottom line to decline this year by 7 percent, from $3.54 billion in 2013 to approximately $3.3 billion. It’s forecasting a 7 percent drop in agricultural and turf equipment. Only six out of 20 analysts surveyed by Bloomberg suggest buying shares of the company.

“We remain concerned with a multi-year Americas ag equipment capex downturn and the industry’s ability to pass through rising equipment input costs,” said Jerry Revich, an equity analyst for Goldman Sachs Group Inc. in March.

Yet farmers are also feeling pressure to keep up with the growing efficiency in their farming equipment. Used, recycled equipment, Guettinger said, has the “softest” prices; more farmers are disinterested in reusing farm equipment, investing in the newest technology. Farmers this year face the decision to either save money on equipment or run the risk of falling behind the rest of their competition with old tractors.

Farmers are constantly looking to expand their land to produce more crops, said Bruce Huber, Illinois farm manager. There is a demand, more than ever before, for farming equipment that can finish agricultural jobs more quickly. And Deere will feel financial pressure as the industry continues to seek greater efficiency in its crop production, demanding more research and development out of manufacturing companies.

“The equipment today that is produced is so good and so efficient, it just allows them to do more than ever before,” said Huber, president of the Illinois Society of Farm Managers and Rural Appraisers.

Guettinger said while Deere is often not the first manufacturer to put new farming technology on the market, the company makes it a priority to develop the technology further to make Deere’s product the best.

And that’s where Deere’s future lies, in equipment such as the new corn and soybean seed planter, which delivers seeds two times faster at 10 miles per hour, that the company created last month.

“They do a lot of work to do it right the first time,” Guettinger said. “They’re never the first ones up to the plate to initiate it.”

Deere shares on Wednesday closed at $91.62, down 2 percent.

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