Food & Beverage

Deere cautiously upbeat on South America ag market despite unfolding Brazil crisis

Key Points
  • Deere reports top- and bottom-line beats on fiscal second-quarter results.
  • Shares soar 7 percent and touch a new 52-week high during Friday's session.
  • The North American ag sector is 'stabilizing,' but overseas is driving growth this year.
  • Deere's CFO believes that despite uncertainty in Brazil the government will remain supportive of agriculture.
Farmer Claudio Lagomarsino cleans his John Deere combine after a day of harvesting wheat near Salto, Argentina.
Diego Giudice | Bloomberg | Getty Images

Deere on Friday expressed cautious optimism about the agricultural outlook for its South American business despite an emerging political crisis in Brazil that puts recovery of the country's farm sector at risk.

The world's largest agricultural machinery maker's stock jumped more than 7 percent in trading Friday after it beat on fiscal second-quarter earnings per share and sales and hiked its profit guidance for the full year. Deere still is forecasting down sales in the current fiscal year from its North American ag business but said it is seeing signs of "stabilizing."

As for South America, Deere said during its earnings call that prior to the recent political uncertainty in Brazil it was seeing the farm machinery market doing much better. It indicated that the recovery followed farmer confidence coming back after the last political crisis in the South American nation known as a major producer of agricultural commodities.

"Obviously, in the last week there's been ... some uncertainty injected back into that market," Tony Huegel, director of investor relations for Deere, said on the company's fiscal second-quarter earnings call.

Even so, Deere said the South America market is seen as a standout in terms of tractor and combine sales growth this year, with the Moline, Illinois-based company looking for about 20 percent growth in the region, outpacing the U.S. and other key markets. That forecast for South America sales growth was revised from the high end of management's previous range guidance.

Management remains cautiously hopeful that the new presidential impeachment crisis in Brazil won't dampen demand for farm machinery in a market that has been one of Deere's engines for sales growth.

"Ag exports is very critical to Brazil and for foreign exchange, and historically you've seen —regardless of the party — support in all the agriculture sector," said Deere Chief Financial Officer Rajesh Kalathur.

"We cannot say what's likely to happen," Kalathur said. "If you look at the past, and look at what is good for Brazil, we see them continuing to support the ag sector."

The Brazilian government provides stability to the country's agribusiness sector through key payments to farmers in the form of credit subsidies. Brazil is the world's second-largest producer of soybeans and a major producer of corn.

Brazilian President Michel Temer, who has been seen as supportive of agriculture and encouraged efforts to make it more efficient, faced calls to resign this week amid a growing scandal over alleged bribery. Last year, Brazil's Senate impeached his predecessor, Dilma Rousseff, for manipulating government finances.

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In recent days, there's been increased selling of soybeans by Brazilian farmers amid the political uncertainty and decline in the value of the Brazilian currency, the real. Prior to that, farmers had generally been holding on to their crops looking for better pricing in the market.

That said, weakness in the Brazilian currency may not necessarily be a bad thing for Deere.

Huegel said there's actually been some "good news" from the selling because it's brought "a lot of cash into those farmers' pockets again."

Brazilian farmers generally sell their crops in U.S. dollars. Brazil is expected to have a record crop of soybeans and corn this year.

The wave of farmer selling in Brazil caused Chicago-traded soybean futures to fall 3 percent on Thursday, but they bounced back some on Friday. Also, corn futures were up just under 2 percent on Friday due primarily to U.S. weather concerns.

In stock trading Friday, Deere rose $8.23, or 7.3 percent, to $120.90. Volume was more than three times its average daily turnover, and the stock touched a 52-week high during the session of $122.24.

The rally in the shares followed Deere reporting better-than-expected EPS and sales in the fiscal second quarter ended April 30. Deere also lifted its full-year profit forecast and guidance on the flagship ag and turf segment.

For the quarter, Deere reported EPS of $2.49 in the fiscal second quarter, well above Thomson Reuters' estimate of $1.68. That compared with EPS of $2.36 in the year-ago quarter.

Worldwide revenue in the quarter grew 5 percent to $8.2 billion, blowing past the forecast of $7.3 billion.

Deere sees net income of approximately $2 billion in the current fiscal year, ahead of its prior guidance for $1.5 billion.

The company also lifted its worldwide ag and turf sales forecast for the full fiscal year, indicating that growth of about 8 percent from a year ago would be driven largely by overseas demand.

Deere said the North American business remains challenging but indicated there are signs of improvement, particularly for the larger agricultural equipment it sells.

"It does appear the large ag market is stabilizing," said Huegel. "We are starting to see some of them [farmers] stepping in a bit more into the market and beginning some replacement of their equipment."

For the North America market, Deere sees ag and turf sales falling 5 percent this fiscal year, or the low end of its previous guidance range for 5 to 10 percent decline.

The U.S. farm economy has been struggling since 2012 due to low commodity prices for major ag crops such as corn and weaker farm incomes. That also has led to a glut of used farm machinery equipment in recent years, which has further pressured the market for new tractors and combines.

Elsewhere, the company said Asia market ag equipment sales are projected to be "flat to up slightly" this year, unchanged from its earlier forecast, while the European Union ag market is seen producing sales "flat to down 5 percent."

Huegel said there's "improved sentiment" in the EU region due to higher dairy and livestock profit margins, but added that weak farm incomes as well as geopolitical risks continue to weigh negatively on the market.

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