Deere and Co. doubled its operating profit from production agriculture in the latest quarter, expecting row-crop farmers to be “very profitable” this year and making money well into 2024 due to the historically strong commodity markets.
Deere on Friday reported earnings after taxes of $2.86 billion across all its business for the second quarter that ended April 30, an increase of 36% over the same quarter a year ago.
The operating profit for Deere’s production and precision ag agriculture segment jumped 105% to $2.17 billion from a year earlier.
The company expects production and precision ag sales for the full fiscal year to be up 20% over FY22.
Brent Norwood, head of investor relations for Deere, told analysts the company’s farmer customers “are going to be very profitable this year" and data from USDA’s supply and demand reports indicate producers "are still going to be making good money” into 2024.
“I think you'll still see profitability at levels that are capable of stimulating a replacement (equipment) demand even beyond where we're at today," he said.
Industrywide sales of four-wheel-drive tractors and combines were up 66% and 70% respectively in April, according to the Association of Equipment Manufacturers, and Deere indicated it did better than that.
Kanlaya Barr, director of corporate economics for Deere, told analysts grain stocks continue to be tight and that bumper crops in Russia, Australia and Brazil haven’t been sufficient to compensate for recent losses in Argentina and Ukraine.
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She said corn and soybean prices remain at historically high levels and the prices factored into crop insurance this year will help protect farmer revenue. Input costs have also “come down quite a bit,” she said. “Not all farmers will be able to realize those savings this year, but that could be a tail wind for the next crop.”
She also said growing, long-term demand for biomass-based diesel and sustainable aviation fuel would continue to underpin the farm economy for some time.
While interest rates have risen sharply as the Federal Reserve has tried to bring inflation under control, interest costs are a relatively small part of farm expenses, Barr said.
Interest costs account for 6% to 7% of total ag production expenses, with about half the interest costs tied up in mortgages that are primarily fixed at relatively low rates. For row-crop farmers, interest costs account for about 1% of overall expenses, she said.
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