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Russell Nemetz Deere Sees Fewer Machine Purchases
by Russell Nemetz, click here for bio

Program: Land & Livestock Report
Date: August 20, 2019

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Deere & Co. provided fresh evidence Friday of weakening conditions in the U.S. manufacturing sector, saying lower demand for U.S. farm commodities is discouraging farmers from buying its machinery.

The Moline, Ill.-based maker of tractors and construction machinery, which reported lower sales for the third quarter, trimmed its forecast for the year. It has struggled to increase sales amid lower commodity prices in recent years that have pulled down farmers' incomes. Now, U.S. farmers are scaling back their purchases as a result of a yearlong trade dispute with China.

"Concerns about export-market access, near-term demand for commodities and overall crop conditions have caused many farmers to postpone major equipment purchases," said Deere CEO and Chairman Samuel Allen.

The manufacturing sector is showing signs of weakness overall. Output has fallen more than 1.5% since December, according to the Federal Reserve.

China, one of the largest importers of U.S. soybeans and pork over the past decade, said earlier this month it would suspend all imports of U.S. agricultural products in retaliation for the Trump administration's plan to expand U.S. tariffs on goods made in China starting last year. The move canceled the purchase of nearly 500,000 metric tons of U.S.-grown soybeans, the U.S. Department of Agriculture said.

Over the first six months of this year, China's agricultural imports from the U.S. were down 20% from the same period in 2018. China's purchases of U.S. farm products last year dropped by more than half from 2017, according to the Department of Agriculture. Deere said it expects equipment sales in Brazil to strengthen in the coming months as farmers there respond to higher demand for commodities from China to replace U.S. exports.

Deere's quarterly sales of tractors, harvesting combines and other farm equipment fell 6% from a year earlier, as profit from the farm equipment business dropped by 24%, the company said Friday. Beside trade uncertainty, Deere said rainy weather that delayed spring planting of crops and weakening equipment sales in Canada also contributed to falling equipment sales in the quarter. An outbreak of African swine fever in China that decimated hog herds and reduced demand for feed affected sales, too, the company said.

"In the United States, 2019 has been a volatile year for farmers, particularly through the Corn Belt," Deere Chief Economist Luke Chandler said during a call with analysts.

Deere expects about $3.2 billion in profit and a 4% increase in equipment sales this year, which includes its construction-equipment line, down from previous estimates for $3.3 billion in profit and a 5% rise in equipment sales in 2019. It is the second straight quarter that Deere has pared its outlook.

The company cut production of farm equipment this spring to lower inventories at its dealerships. Deere said Friday it would initiate additional cost reductions to improve the efficiency of its operations. The company said factory production of high-horsepower models of tractors would be about 5% below retail sales volumes for the rest of the year.

In Deere's third quarter ended July 28, profit declined to $899 million or $2.81 a share, from $910 million, or $2.78 a share, last year. Excluding one-time items, the company made $2.71 a share.

Net sales of equipment fell 3% to $8.96 billion. Analysts were expecting $2.83 a share from sales of $9.4 billion.

Source: DTN

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