Deere Earnings Preview: Declining Farm Income To Temper Agriculture Equipment Sales

Deere & Co. (NYSE:DE) is set to release its fiscal first quarter earnings on Friday, February 20. We expect to see weak sales in its Agriculture & Turf division as grain prices continue to fall and farmers’ income declines. However, this should be partially offset by gains at its Construction & Forestry division.

In the fiscal fourth quarter, Deere’s results surprised the market. The company reported fourth quarter FY 2014 revenues of $8.96 billion, compared to Thomson Reuters consensus estimates of $7.75 billion, and earnings per share of $1.83, compared to consensus estimates of $1.57. ^[1] However, Deere’s weak guidance for FY 2015 overshadowed its better than expected results, as the company forecast a 15% year-on-year decline in overall sales.

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Agricultural Equipment Sales To Decline On Weak Farm Income

The U.S. Department of Agriculture recently released its forecast of U.S. farm income in 2015. It expects a 32% drop from 2014, to reach $73.6 billion, the lowest since 2009. ^[2] This is primarily due to the falling prices of crops such as corn and soybean, which together account for around 50% of crop receipts or 28% of overall commodity receipts. ^[3]

Corn and soybean production has increased significantly in the past two years, driven by favorable production conditions, leading to a decline in their prices. Per the USDA’s estimates, corn prices will decline to an average of $3.50 per bushel in the marketing year 2015, compared to $4.46 per bushel in 2014. ^[4] The price of soybean is also expected to decline from an average of $13.00 per bushel in marketing year 2014 to $10.00 in 2015. As the prices for these crops continue to fall, farmers’ income will be negatively impacted. The declining farm income limits farmers’ ability to purchase new agricultural equipment or repair existing ones. Given the expectations of weak demand for agricultural equipment, Deere announced its forecast of a 20% decline in Agriculture & Turf revenue for fiscal 2015. ^[1]

Deere will be cutting back production in line with the expected demand. It is likely that the decline in production may hurt margins due to higher per unit fixed costs as the division may be operating at less than 80% of normal volumes. Deere’s Agriculture & Turf margins have already been under pressure due to implementation costs related to Tier 4 engines, developed in order to ensure compliance with the new emission standards.

Construction Equipment Sales To Remain Strong

In the previous quarter, Deere’s Construction & Forestry sales grew 23% on the back of a robust U.S. construction sector, wherein housing starts and construction spending showed strong growth despite tough comparables. We expect to see continued growth in the division in the first quarter as well, given the National Association of Home Builders’ forecast of a 16% increase in housing starts in 2015, compared to an 8% increase in 2014. ^[5] However, given its small contribution to the company’s overall revenue, growth in the segment may not be enough to offset the decline in the Agriculture & Turf division.

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1. Deere’s FY 2014 Q4 Earnings Media Release And Financials, November 26, 2014, www.deere.com [↩] [↩]
2. U.S. and State-Level Farm Income and Wealth Statistics, February 10, 2015, www.usda.gov [↩]
3. Cash receipts by commodity rank and share of U.S. total 2012, www.usda.gov [↩]
4. USDA Agricultural Projections to 2024, February 10, 2015, www.usda.gov [↩]
5. NAHB Housing and Interest Rate Forecast, February 2015, www.nahb.org [↩]