Deere is optimistic about U.S. farm economy, misses profit estimate

By Rajesh Kumar Singh

CHICAGO (Reuters) - Deere & Co on Friday offered an optimistic forecast for the U.S. farm economy amid an escalating tariff war with China and other big trade partners as its quarterly profit missed estimates on higher raw material and freight costs.

Shares of the world's largest manufacturer of tractors and harvesting equipment erased early losses to turn higher, trading up 2.6 percent at $140.98.

The trade showdown has depressed U.S. farm commodity prices as China and other trading partners target agricultural exports through retaliatory tariffs, clouding the outlook for equipment demand.

Deere said the trade disputes have not hit demand for replacing aging equipment as farmers are still investing in technologies to make their operations more efficient.

The company said it expects U.S. farm cash receipts in 2019 to be higher than this year as strengthening demand for crops like corn, wheat and cotton are seen offsetting soft demand for soybeans.

"The situation right now is dynamic for the farmers and this can change," Chief Financial Officer Rajesh Kalathur told analysts on an earnings call. "We would anticipate the net returns per acre for major crop farmers, large ag customers, to be higher in 2019 than 2018,"

Deere said early orders for new farm machinery were up this year despite uncertainty over tariffs.

"This essentially confirms that the replacement cycle is alive and well, supporting growth into 2019," said Mircea Dobre, a senior analyst at Baird Equity Research.

Deere's comments are in sharp contrast to recent industry surveys that show the trade war and depressed commodity prices are hurting farmer sentiment.

The Purdue University/CME Group Ag Economy Barometer recorded the largest one-month decline in producer sentiment since data was first collected in October 2015. Reports from Federal Reserve banks in the Midwest also point to growing stress in the farm economy.

Yet, Deere, which finances farmer equipment purchases, further cut the estimate for credit loss provisions for this year and expects it to be well below the 10-year average.

The Moline, Illinois-based company did not change its full-year earnings forecast, banking on replacement demand for large agricultural equipment. It is "confident" it would deliver adjusted net income of $3.1 billion in the fiscal 2018, it said in its Friday quarterly report, versus $2.2 billion in fiscal 2017.

JP Morgan analysts said that would translate into $9.45 per share, lower than the estimate of $9.53.

Adjusted profit in the latest quarter jumped 31 percent year on year to $2.59 per share, but was still below the average analyst estimate of $2.75. The cost of production as a percentage of net sales increased to 77 percent from 75.2 percent in the second quarter.

Total equipment sales in the latest quarter jumped 36 percent from a year ago to $9.3 billion.

Deere said it was addressing cost pressures by keeping a lid on expenses and price increases.

(Additional reporting by Arunima Banerjee; Editing by Jeffrey Benkoe and Bill Trott)