November 23, 2017

Deere & Co Posts Fifth Highest Earnings In History

Deere & Co stocks are soaring higher on Wednesday after the company shocked analysts with unexpectedly high earnings.  The fourth quarter results were largely due to improving machinery demand, an area the company had struggled with since 2014.  The company also raised it’s 2018 sales estimate by a whopping 19% resulting in an earnings projection of $2.6 billion if realized.

The main contributor to the sharp earnings increase was a 23% surge U.S. and Canadian net equipment sales during the fourth quarter.  Other divisions rose as much as 30%.  Net income attributable to the company rose 79 percent to $510.3 million or $1.57 per share in the fourth quarter, while total net sales rose 25.5 percent to $7.09 billion.

Analysts had expected fourth-quarter earnings of $1.47 per share and sales of $6.99 billion.  This is the fifth quarter in a row the company has outperformed expectations.

“John Deere has completed another successful year as markets for farm and construction equipment showed improvement and our actions to build a more durable business model yielded strong results,” said Samuel R. Allen, chairman and chief executive officer, adding that the year’s sales and earnings were the fifth-highest in company history. “We saw higher overall demand for our products with farm machinery sales in South America making especially strong gains and construction equipment sales rising sharply. At the same time, the company realized continued benefits from its broad product portfolio and agile cost structure. As a result, Deere has remained well-positioned to serve present customers while making investments aimed at driving growth and attracting additional customers in the future.”

Investments made or announced during the year included the acquisition of the Wirtgen Group, the
world’s leading manufacturer of road construction equipment. The transaction is expected to be finalized next month. “Wirtgen will establish Deere as a substantially more prominent player in global construction equipment markets,” Allen said.

Congress Ramps Up Pressure Over NAFTA Process

Congress is ramping up pressure on the Trump administration over the so far uneventful NAFTA negotiations.  As the fifth round of trade talks wrap up in Mexico City this week, there have been no reported breakthroughs and stalemates seem to abound.  Agricultural policy has been a major point of contention, even to the point that U.S Commerce Secretary Ross called out the industry and its push to “do no harm” as a major cause of the delays.  The lack of any progress has forced participants to push back their Dec 31st deadline, saying no agreement is now expected before at least March of 2018.

The delays haven’t helped the political climate.  In fact, revamping NAFTA was never a popular move on Capitol Hill and now it seems as though Congress is losing patience.  A bipartisan group of senators, including several heavy hitters on the Ag Committee and all four senators from North and South Dakota, have sent a letter to Secretary Ross.  In the letter, the senators underscore the vital role agriculture plays in the U.S. and say they find it essential that Congress’s voice be heard in the process.  Further, they say they “find it imperative that before any changes are made to NAFTA, or any other free trade agreement, that economic analysis the illustrates the impact on the full supply chain of the  industries involved be shared.  As such, we request an economic analysis that examines and evaluates the impacts to crop and livestock sectors as a result of any change to NAFTA”

That letter, importantly, was also signed by Senator John Cornyn of Texas.  Cornyn is the chair of the Senate Finance subcommittee on trade and also serves as majority whip.  His home state of Texas is also expected to be one of the hardest hit economically if a talks do fall apart.  After recent NAFTA testimony in front of his subcommittee, the Senator seemed resolved in his support, saying “the administration needs to keep Congress in mind and know that lawmakers will need to approve any renegotiated NAFTA”.

Its that approval that may be strengthening Canada in the negotiations, according to experts.  Sources from that country have said that negotiators there may hold out, forcing the Trump administration to attempt to leave NAFTA and ultimately into a stalemate with Congress where nothing happens.  That resolve may be echoed in Cornyn’s other statement: “Failure is not an option”.

China Bumps Canada, Mexico Out Of Top Spot As Buyer Of Ag Goods

New numbers out this week show that China is the new number one buyer of American agricultural goods.  Fiscal year 2017 numbers show that China bought $22 billion worth of agricultural products, which is a large jump from the $19.2 billion purchased the year before. The increase meant China moved into the number one customer spot, pushing America’s NAFTA partners down a space each. Now second-place Canada purchased $20.4 billion worth of goods, a slight jump over the previous year. Number three Mexico bought six percent more goods in the fiscal year 2017, coming in at $18.6 billion.

USDA says the total number of exports jumped $10 billion dollars, coming in at $140.5 billion, the third-highest on record. Farmers produced another record corn crop and the protein sector continues to expand, so it’s going to take expanded exports to chew through the extra product that’s available.  Ag Secretary Sonny Perdue says the ag sector posted an annual trade surplus of $21.3 billion, an amazing 30 percent rise over the previous year.

Its important to remember that fiscal year measurements run September to September, so grain sales included in this number are largely the result of 2016 sales.  Exports of both corn and soybeans were stellar over that time frame, but sales so far of 2017 are running well behind schedule.  With massive amounts of carryout for both products, experts say export growth will be pivotal to improving prices.