The world’s largest farm equipment manufacturer now expects net income in fiscal 2021 to be between $5.7 billion and $5.9 billion, up from a range of $5.3 billion and $5.7 billion forecast in May (all figures US$). This is the third upgrade in the company’s earnings estimate in seven months.

Higher farm income following a run-up in commodity prices and the need to replace aging fleets are driving up demand for new tractors and combines.

“Looking ahead, we expect demand for farm and construction equipment to continue benefiting from favourable fundamentals,” Deere CEO John May said.

The demand is booming at a time when dealer inventories are at a record low and the pandemic has disrupted the supply chain, extending the time equipment makers need to produce new orders. Big tractor makers including Deere are booking orders for delivery in 2022.

With supplies lagging demand, farm machinery companies are able to push through price increases to offset their soaring input costs.

For example, Deere’s revised earnings estimate assumes an eight per cent gain in prices for large farm machines. That compares with a six per cent price increase estimated in February.

The company also revised up the outlook for industry sales of agricultural equipment in Europe and Asia, though it left estimates for sales in the U.S., Canada and South America unchanged.

Earnings for the third quarter came in at $5.32 per share, up from $2.57 per share ago. Analysts surveyed by Refinitiv, on average, expected the company to post a profit of $4.55 per share.

Equipment sales rose 32 per cent year-on-year to about $10.4 billion.

— Reporting for Reuters by Rajesh Kumar Singh in Chicago and Sanjana Shivdas in Bangalore.

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In a pitch to investors, CEO John May said the measures are expected to boost operating profit margin to 15 per cent by 2022 from 12.5 per cent projected for this year.

The steps, outlined by the company’s new leadership, are part of a broader trend in the U.S. manufacturing sector which is facing its deepest slump in more than a decade.

In a bid to smooth earnings volatility, manufacturers such as Caterpillar are slashing costs and focusing on more profitable parts and services businesses.

May, who took over Deere’s reins in November, aims to shore up the company’s fortunes which have taken a hit from Sino-U.S. trade tensions as well as poor weather in the American farm belt that has slowed equipment purchases by farmers.

The Moline, Illinois-based company reported lower profits in the latest quarter and has warned of lower earnings this year.

U.S. President Donald Trump announced last month that China had agreed to double its pre-trade war purchases of U.S. agricultural products over the next two years as part of a Phase One trade deal. Still, Deere expects industry sales of farm equipment in the United States and Canada, its biggest market, to decline about five per cent this year.

In response to weak demand, the company has cut production and laid off workers.

May said Deere is reviewing its overseas manufacturing footprint in markets that have peaked or where it has over-invested. He did not provide the names of those facilities.

The company is also carrying out a voluntary separation program for its salaried employees, now projected to result in savings of US$120 million, lower than US$150 million estimated earlier.

May expects the cuts to add one percentage point to Deere’s profits by 2022.

The company is aiming to get a similar profit boost from investments in data-driven farming, known as precision agriculture, which enables farmers to plant according to the fertility of the soil, helping reduce input costs and enhance yields.

Similarly, it is betting on its parts and maintenance services business to contribute 50 basis points in added profits over the next two years. The segment currently accounts for a fifth of the company’s sales.

— Reporting for Reuters by Rajesh Kumar Singh.

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The layoffs come week after the company said it would reduce production by 20 per cent at its facilities in Illinois and Iowa in the second of half of the year to keep inventory in line with retail demand.

The world’s largest farm equipment maker is reeling from the fallout of the U.S.-China trade war that has slowed purchases from farmers.

Meanwhile, lingering trade tensions have inhibited manufacturing activity and investment in nonresidential construction.

Weaker demand in the latest quarter dented its earnings, forcing Deere to trim its full-year earnings forecast and initiate a review of costs.

In August, the Moline, Illinois-based company said it was assessing its manufacturing footprint as part of the cost structure review.

In an emailed response, Deere said 50 production employees at Harvester Works, which makes large agriculture equipment, in East Moline, Illinois, would be put on indefinite layoff. Separately, 113 workers would be laid off for an indefinite period at its construction and forestry plant in Davenport, Iowa.

Deere’s shares closed on Tuesday down 1.9 per cent at $165.50 (all figures US$).

The year-long tariff war between the U.S. and China has slashed the export earnings of American farmers. China imported $9.1 billion of U.S. farm produce in 2018, down from $19.5 billion in 2017, according to the American Farm Bureau.

U.S. shipments to China of soybeans, the country’s most valuable farm export, sank to a 16-year low last year as Beijing shifted purchases mostly to Brazil, leaving U.S. farmers with a surplus.

Deere has said it expects industry sales of agricultural equipment to be about the same as last year in the U.S. and Canada, which account for 60 per cent of its overall business. Sales in the region were earlier projected to be flat to up five per cent earlier.

— Reporting for Reuters by Rajesh Kumar Singh in Chicago.

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The company’s stock was up 6.4 per cent at $156.24 in early afternoon trading on the New York Stock Exchange (all figures US$).

Deere missed its second-quarter profit estimates amid higher freight and raw-material costs. The company’s sales costs shot up by 35 per cent in the quarter from a year ago and it also expects input costs during fiscal 2018 to be higher than its previous estimate.

“Material and freight costs have exceeded our forecast for the year, due largely to inflation in U.S. steel prices and a tight market for logistics,” said chief financial officer Raj Kalathur.

In response to those increases, the Moline, Ill.-based company said it was carrying out structural cost cuts and price increases.

U.S. President Donald Trump’s tariffs on steel and aluminum imports have inflated raw material costs for U.S. manufacturers. Caterpillar last month warned that rising materials costs could squeeze profit margins in the coming quarter.

Deere expects full-year adjusted earnings to be $3.1 billion, higher than $2.85 billion forecast earlier. Net sales and revenues are expected to jump about 26 per cent from the previous year.

It sees a 30 per cent annual increase in full-year equipment sales.

Adjusted profit in the quarter ended April 29 came in at $3.14 per share, lower than analysts’ average estimate of $3.31 per share.

Freight costs were up as the company resorted to premium freight to address supply issues.

Deere’s sales in the first quarter were hemmed in by delays in shipping products to dealers and supply constraints, but the company on Friday said the supply situation has improved.

Deere has been battling tepid demand in North America, its biggest market, for the past four years as U.S. farm income has more than halved since 2013.

Replacement demand for an aging fleet continues to drive farm equipment sales in the region, the company said. But it trimmed its farm equipment sales growth forecast to 14 percent for 2018 as it expects U.S. net farm cash income to dip further this year.

That projection could change if a U.S. trade spat with China escalates, increasing trading costs for farmers who are already feeling squeezed by rising interest rates and high land prices.

In retaliation for U.S. President Donald Trump’s proposed crackdown on Chinese imports, Beijing has proposed duties on U.S. farm imports such as soybeans, wheat and corn.

— Reporting for Reuters by Rajesh Kumar Singh.

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For the past four years, Deere has been battling weak demand for farm equipment as a global grain glut pushed down prices, sending U.S. farm incomes plunging.

Yet, it expects higher demand for large agricultural equipment to lift industry sales in the U.S. and Canada, the company’s biggest market, by 10 per cent during the year.

“Despite rangebound commodity prices, the industry is experiencing stronger replacement demand,” said Brent Norwood, manager investor communications at Deere.

Higher housing starts in the U.S. and increased activity in the oil and gas sector are projected to boost global construction equipment sales by 80 per cent in fiscal 2018.

The Moline, Illinois-based company now expects full-year sales to be up 29 per cent from a year ago, a seven-percentage-point increase from its previous estimate, helped by its acquisition of Germany’s Wirtgen Group last year and a favourable currency effect.

Equipment sales in the second quarter are expected to increase by 30-40 percent.

However, Deere cut the full-year net income estimate to $2.1 billion, from $2.6 billion earlier, on U.S. tax reform-related adjustments of $750 million (all figures US$). Adjusted net earnings for the year are projected to be $2.85 billion.

Supply chain bottlenecks

Deere’s robust sales guidance comes weeks after Caterpillar’s upbeat earnings, which benefited from a strong global economy, particularly strength in the U.S.

But strengthening demand is also causing supply constraints. Delays in shipping products to dealers hemmed in sales growth in the fiscal first quarter ended Jan. 28 at 27 per cent, below earlier guidance of 38 per cent.

Deere hopes to fix the bottlenecks by the third quarter.

It forecast a five per cent year-on-year drop in U.S. net farm cash income this year. But the projected decrease is smaller than earlier estimated.

Declining incomes are weighing on demand for large tractors, which Deere said remains well below mid-cycle levels.

The company swung to a net loss of $535.1 million, or $1.66 per share, including a $965 million charge related to U.S. tax reform in the first quarter. Adjusted net income was $430.0 million, or $1.31 per share.

— Reporting for Reuters by Rajesh Kumar Singh.

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