When companies post mixed quarterly results and warn of lower profits for the current year, it’s always instructive to look at the reasons for these changes.
Deere and Company, the makers of John Deere machinery that’s used principally by farmers for planting, growing and harvesting their crops, have a long history of weathering adverse conditions, such as the 2013/14 years when corn prices dropped dramatically. This time, however, there is an obvious reason for the current issues at the company – the weather. The Midwest floods delayed the planting season for many farmers, causing them to wonder if a crop would be harvested this year and making them reluctant to invest in new equipment. For that reason, it’s expected that Deere’s current issues should prove temporary. Because farm equipment takes some time to make, Deere has longer-dated contracts. The company has compensated for the current situation, and for the smaller impact of the trade discussions, by cutting its production voluntarily, which signals that it is uncertain when things will turn around – possibly, as the company has said in its quarterly reporting, not for the remainder of the year. Interestingly, however, Deere isn’t suffering from “secular issues,” (ref WSJ) and its stock has shown that it can hold its value even when crop prices aren’t that strong. Smaller tractor sales tend to fall when “Main Street” pockets are squeezed, but food sales generally stay resilient which protects the company’s main business of supplying large farming equipment. This circumstance differs significantly from other industrial conglomerates, such as General Electric, whose recent problems were the result of a long-term decline, without intercession, of its core businesses. With Deere, its central core is distinctly sound and when conditions change, so will its farming equipment sales. In this way, the company experiences the same kind of vagaries as do its customers, the farmers – a goodly amount of the production equation depends on the weather conditions each year. The 281-year-old company has weathered its share of poor planting seasons. As the WSJ has said, “Deere may be plowing hard ground [currently], but easier tilling is ahead.” It’s a fair certainty that when farmers have experienced a successful crop production season, they’ll be lining up at Deere for those new equipment purchases that they’d deferred.