Can Deere Overcome Its Current Challenges?

Farm equipment major Deere & Co (NYSE: DE  ) has had a lot of things going for it in the last couple of years (high crops prices, good demand) and the company made the most of it by registering record profits for three straight years. But 2014 is "pivotal" and in spite of a strong first quarter ended Jan. 31, Deere has maintained its 2014 outlook of lower sales. The company is chasing a goal of doubling 2010 sales by 2018 to $50 billion. Will the current slowdown be a roadblock for Deere?

The headwinds
Higher sale of heavy machinery and favorable farm conditions, especially in North and South America, were behind the company's agriculture and turf equipment division's record revenue in 2013 at $29.1 billion, a 7.4% increase from 2012. But this could change in the current year.

The ag division accounts for more than 75% of Deere's sales and faces headwinds in 2014. Reuters has reported that U.S. farm cash receipts, which are a good indicator of farm equipment sales, are expected to be down 10% in 2014. Deere's projections peg the figure to be at $378 billion, down from the 2013 estimate of $408 billion.

South America could be the other painful point. Deere has been banking hugely on growth from the region -- net sales from Central and South America have risen at a compounded annual growth rate of 18% from 2007 to 2012.

Brazil has been a huge part of that growth -- Deere holds a 21% market share. But, the country is currently hovering dangerously close to recession, and the government is trying to rein in inflation by raising interest rates. Even the IMF is expecting Brazil's 2014 GDP growth rate to drop further. Approximately 20% of the nation's GDP comes from agriculture.

Such grave scenarios are bound to impinge on farmers' income, and thereby the sale of ag equipment. According to Deere, industry sales of combines and tractors may go down by 5%-10% in the region from the strong 2013 levels. Agco (NYSE: AGCO  ) has also predicted tractor sales in Brazil to be down by 5% in 2014. Agco is the largest seller of ag machinery in Brazil, with 47% market share.


The 8R/8RT series tractor. Source: Deere

Deere has forecasted that its total farm sales will go down by 6% in 2014 with the decline mainly in heavy machinery. This will also pull down the company's overall sales by the same percentage. Agco, facing similar headwinds expects to barely hold on to its 2013 sales level of $10.8 billion. It has forecasted 2014 sales in the range of $10.8 billion-$11 billion.

Long-term promise
Despite the gloomy clouds, there is a silver lining -- Deere is investing heavily in its core ag business so that it's in a solid position when the industry trends turn favorable. It's banking on new products and markets to fuel long-term growth.

Deere's new line of planters -- ExactEmerge and MaxEmerge -- are two times faster than present machines, allowing farmers to cover more acres in less time. Talking about the innovative planters at the annual shareholders meeting in February, company chairman and CEO Samuel Allen said, it "could be a real game-changer in helping farmers achieve higher yields." To keep offering newer and better products with the latest and advanced technology, Deere is focusing a lot on research and development.


MaxEmerge 5. Source: Deere

Another area of focus has been the emerging economies. Despite the current uncertainties, the BRIC countries are of immense significance in Deere's growth strategy. The company considers Brazil, China, India and Russia to be potential high-growth markets and is constantly strengthening its presence in them. The farm major has built seven new factories in these countries that will be ready for production in 2014 – three in China, two in Brazil, one each in India and Russia. In fact, such is Deere's thrust on global growth that for its 2018 goal of reaching $50 billion mid-cycle sales, the behemoth wants half to come from outside the U.S. and Canada.

The construction and forestry equipment segment is also a bright spot. This division is expecting to see a 10% rise in 2014 from $5.87 billion that it registered in 2013, on the back of higher housing activity in the U.S. and elsewhere. Construction equipment giant Caterpillar (NYSE: CAT  ) , too, has echoed similar sentiments. The company is hoping that the anticipated 5% rise in its construction business will cushion the 10% drop in the mining segment. In line, Cat expects 2014 sales to rise to $56 billion from $55.7 billion in 2013.

Feet on ground
Deere has shown tremendous growth in the past decade. Softness in the agriculture market is a short-term concern as the farm sector has huge growth potential, especially in emerging nations. The ever-growing demand for food from the burgeoning world population will keep companies like Deere in the green. But Deere is not sitting pretty on that fact, and is going all out to introduce better products and penetrate deeper into new markets to meet its targets.

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