Farm Slump Slows Deere's U.S. Sales -- Update

By Bob Tita Features Dow Jones Newswires

Equipment maker Deere & Co. continues to face headwinds from the troubled U.S. farm economy.

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Deere's farm and construction equipment sales rose 17% in the company's fiscal third quarter ended July 31, but fell short of expectations. Deere's shares fell 5.1% to $117.65 on Friday.

Strong equipment demand abroad wasn't matched in the U.S. and Canada -- Deere's biggest market -- where sales grew 11% with help from a big bounce in construction and forestry machinery sales. U.S. farmers have been reluctant to purchase new equipment as a multiyear slump in grain and livestock prices weighed on their incomes and buying power. Improving crop yields and forecasts for another bumper harvest this year have prompted expectations for the fourth consecutive year of declining U.S. farm incomes.

Across the industry, Deere expects farm-equipment sales in the U.S. and Canada to fall 5% this year. Still, Deere slightly raised its profit forecast for its fiscal year ending Oct. 31 to $2.1 billion and said it expects farm and construction equipment sales to rise 10% overall. Deere said market conditions continue to improve, but didn't offer an outlook yet for its 2018 fiscal year. Third-quarter sales of farm machinery rose 13% to $5.3 billion.

"It does appear the large ag-equipment market is stabilizing," said Joshua Jepsen, Deere's manager of investor communications. "The used equipment environment is supportive of sales."

Deere said dealer inventories of used equipment have fallen by more than one-third since their peak levels in 2014. Falling used equipment inventories can be a harbinger of rising demand for new equipment.

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"Farmers' capital purchase patterns are returning now that used equipment inventories are approaching more traditional levels," said Deere's Chief Economist J.B. Penn.

Sharply higher sales and profit from Deere's construction and forestry equipment unit in the second quarter helped offset lackluster farm-related sales in North America.

Sales elsewhere in the world were more robust, rising 25% in the quarter. Record harvests and favorable exchange rates have fueled booming demand for farm equipment in South America, driving much of that sales gain. Deere expects industrywide equipment sales in South America to rise 20% this year, thanks in large part to booming crop production in Brazil.

"Demand continues to be very strong there," said Tony Huegel, Deere's director of investor relations.

Deere's construction-equipment sales rose 29% from last year to $1.5 billion, as operating profit more than doubled to $104 million. The Moline, Ill., company said in June that it plans to purchase German road-paving equipment maker Wirtgen Group for about $5 billion. The acquisition, the largest in Deere's history, is expected to expand the reach of its construction business outside North America.

Overall for the quarter, Deere reported a profit of $641.8 million, or $1.97 per share, compared with $488.8 million, or $1.55 a share, a year earlier. Equipment sales reached $6.83 billion, up 17% from last year. Analysts had expected Deere to earn $1.95 a share on net equipment sales of $6.92 billion.

Write to Bob Tita at robert.tita@wsj.com

(END) Dow Jones Newswires

August 18, 2017 13:00 ET (17:00 GMT)