Deere & Co. said farmers are delaying purchases of machinery as they wait for a resolution of trade standoffs between the U.S. and major foreign buyers of farm commodities such as China. The company said Friday that initial orders of tractors, combine harvesters and other equipment were weak, contributing to the lower-than-expected quarterly profits.
“The trade uncertainty is pausing some purchasing decisions as customers take a wait-and-see approach,” said Joshua Jepsen, director of investor relations, on an investor call. Deere’s shares were recently down almost 2% at $159.35.
Early orders are typically a strong driver of annual sales for the Moline, Ill.-based company. Farmers often place orders for multiple pieces of equipment in the late fall and winter in exchange for price discounts. The company said initial buying across its major equipment categories was flat or down moderately from last year.
Trade disputes with major buyers of U.S. farm commodities such as China and Mexico have further rocked agricultural markets already struggling from a multiyear slump in prices for corn, soybeans and other commodities, caused by a world-wide glut.
Deere said farmers are closely watching a March 1 deadline for a potential trade settlement between the U.S. and China. The U.S. has threatened to impose more tariffs on March 2 if a deal isn’t reached. Exports of U.S.-grown soybeans to China collapsed last year. China imposed a tariff in retaliation for U.S. duties on hundreds of manufactured goods from China.
Even without a trade deal, Deere is betting that farmers will step up their purchases of equipment later in the year to replace older machines. The company maintained guidance issued in November for net income of $3.6 billion in its fiscal year ending in October, and raised its global sales growth outlook for farm equipment to 4% from 3%.
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Revenue from farm and turf equipment rose 10% during the company’s fiscal first quarter, but the company said sales were weighted toward smaller, lower-margin equipment. As a result, profit from the farm unit slipped 10% from a year earlier to $348 million. The operating margin from the farm machinery business fell to 7.4% from 9.1%.
The company said profit was squeezed by rising costs for steel and other materials and transportation for components. The company’s expenses rose 43% during the quarter from last year. Deere said it continues to rely on costly airfreight to deliver some critical components.
Deere reported higher sales and profit in its construction machinery business stemming from the 2017 acquisition of Wirtgen, a road-paving equipment maker in Germany.
For the quarter to Jan. 27, Deere reported net income of $498.5 million, or $1.54 a share, compared with a loss of $535.1 million, or $1.66 a share, a year earlier. The company took a $977 million charge last year because of U.S. tax law changes. Total equipment sales increased 16% to $6.9 billion. Analysts were expecting earnings per share of $1.76 from equipment sales of $6.8 billion.