(Bloomberg) -- U.S. farmers’ incomes are set to plunge to a 12-year low, but that’s not enough to stop them from investing in new tractors and combines.
Despite a deep and painful slump for the American agricultural economy, sales of Deere & Co. signature green-and-yellow machines are rebounding. The largest manufacturer of farm equipment will probably raise its full-year profit forecast when it reports quarterly earnings Friday, according to analysts surveyed by Bloomberg.
Why is Deere doing so well when conditions are deteriorating for the average farmer in the U.S., its largest market? One answer is the increasing consolidation, with just 4 percent of U.S. farms producing two-thirds of the country’s food, according to the most recent census from the U.S. Department of Agriculture.
With thousands of acres to manage, these larger farming operations rely on mechanization and plan replacement cycles for their equipment. Because of the high cost of equipment failure during planting and harvesting, they’re willing to trade in their machines either annually or every few years, according to Matt Arnold, an analyst with Edward Jones & Co. in St. Louis.
To be sure, Deere may stand to benefit as well from recent U.S. tax reform, which favors companies that are net exporters, Arnold said. The Moline, Illinois-based company also makes equipment for the construction industry, which unlike agriculture is in the middle of a global boom. It expanded that segment of its business in 2017 with the acquisition of Wirtgen Group, a maker of roadbuilding machines.
But Deere’s core activity remains tractors, combines and other machines used on the farm. That sector started emerging last year from a sharp downturn that lasted several years and led to production cuts at Deere and other manufacturers. That’s led to lower dealer inventories, Ubelhart said.
Revenues will now see a bump as those companies begin to raise production again, while increasing used-equipment prices are motivating more farmers to replace their machines, she added.
For its fiscal first quarter, Deere’s sales rose to $6.41 billion from $5.52 billion a year earlier, according to the average of 12 analysts’ estimates. Earnings per share excluding one-time items are seen at $1.22. For fiscal 2018, the average estimate is for net income of $2.65 $billion, compared with the company’s previous projection for $2.6 billion.
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