Deere ‘Scaling Back’ Output as Forecast Cut on Lower Demand

Aug 13, 2014 4:20 pm ET

(Updates with closing share price in third-last paragraph.)

Aug. 13 (Bloomberg) -- Deere & Co., the world’s largest agricultural-equipment maker, cut its fiscal-year profit forecast and said it will scale back production as record crops weigh on grain prices and deter spending by U.S. farmers.

Net income in the year through Oct. 31 will be about $3.1 billion, Deere said today in a statement, down from a May projection of about $3.3 billion. The Moline, Illinois-based company also said it now sees equipment sales falling about 6 percent, compared with a May prediction for a 4 percent decline.

“For the balance of the year, the company will be scaling back production in line with demand for our agricultural products,” Samuel R. Allen, chairman and chief executive officer, said in the statement.

Deere said agricultural-equipment sales will be flat or worse in each of its regional segments, with a decline of about 10 percent seen in the U.S. and Canada, which together are the company’s largest market. Falling commodity prices are contributing to a reduction in farm income, which in turn is putting pressure on demand for farm equipment, it said.

“This is the beginning of the weakness,” Lawrence T. De Maria, a New York-based analyst for William Blair & Co. who has a sell rating on the stock, said today in an interview. “We believe that the bigger downside will occur next year and the year after.”

Record Harvest

Prices for corn, soybeans and wheat have each dropped more than 10 percent in the past year in Chicago on expectations of rising global supplies. Net U.S. farm cash income will fall 22 percent to $101.9 billion in 2014, according to a projection from the U.S. Department of Agriculture.

Farmers in the U.S., the world’s biggest grower of soybeans, will harvest a record soy crop this year, the department said yesterday in a report, after rain and milder weather created ideal growing conditions. The department also predicted record U.S. production of corn.

Deere also reported today that fiscal third-quarter net income dropped to $851 million, or $2.33 a share, from $997 million, or $2.56. That exceeded the $2.20-a-share average of 19 analysts’ estimates compiled by Bloomberg. Equipment sales fell to $8.72 billion, from $9.32 billion a year earlier, matching the average estimate.

The shares declined 2.3 percent to $84.49 in New York, the biggest drop in more than six months.

The company saw an improvement at its construction and forestry business in the quarter. Sales rose 19 percent, on both higher volumes and price increases, Deere said. The company expects worldwide sales of construction and forestry equipment to climb by about 10 percent for the full year, reflecting further economic recovery and higher housing starts in the U.S., as well as sales increases outside the U.S. and Canada.

Agricultural machinery sales accounted for 78 percent of Deere’s revenue in 2013, while construction and forestry made up 16 percent, according to data compiled by Bloomberg.