The Future of Emerging Markets Wouldn't Be as Clear Without Deere & Co.

Deere is rapidly expanding its footprint across the world, which should result in strong profit growth thanks to rising populations and standards of living in the emerging markets.

Apr 2, 2014 at 9:45AM

Heavy machinery maker Deere & Company (NYSE:DE) is about as American a company as it gets. The company's namesake machinery can be found working farmland and forests across the country. And yet, as far as the future is concerned, Deere is going global. It's generating a huge percentage of its business from international markets, a trend that is only going to accelerate from here.

A lot of this is due to rising global populations across the globe. As stated in last year's annual report from fertilizer producer Mosaic Company (NYSE:MOS), management stated some startling statistics about the state of the world. The global population recently crossed 7 billion, and will hit 9 billion within the next 35 years. In addition, consider that farmers will have to grow as much food over the next 50 years as they have over the full course of recorded human history.

Population growth in developed nations like the United States has leveled off. By contrast, populations are rising rapidly in the emerging markets, and when you combine that with the prospect of rising standards of living in these countries, it's plain to see why Deere is making emerging market growth a top priority going forward.


Deere running wild abroad
Of the 9 billion people on the planet by 2050, Deere believes 70% will live in cities. An expanding population, which will be increasingly urban, will enjoy rising standards of living characterized by diets dependent on grain-intensive foods such as meats. The end result is that Deere believes agricultural output will need to double by 2050. To meet this demand, the pressure is on for Deere to satisfy the need for more food, fuel, shelter, and infrastructure.

Fortunately, Deere is more than up to the challenge. Deere's strategy is to focus on innovation, combined with keeping strict control over costs. The end result is incredible profitability, which is already showing up in the company's operating performance. Last year, Deere generated record profit for the third year in a row, and eighth out of the last 10. It produced $3.25 billion in cash flow in 2013, which helped fund its hefty investments in international expansion.

Over the past three years, the company announced plans to build seven new factories outside North America designed to service the international markets. Deere management is extremely excited to report that all seven were completed last year, and will be ready for higher production this year.

Three of the factories are in China, for construction equipment, engines, and large farm machinery. Two are in Brazil, with the remaining facilities located in India and Russia, for the manufacture of farm tractors and seeding and tillage equipment.

Deere's path to future prosperity
The global population has soared in recent years and is only going to continue going up, thanks to rapid economic growth in the emerging market nations. This will place an unprecedented strain on global food production, especially since the amount of farmland available for food production won't be increasing any time soon. In addition, an increasingly urban population will need more roads, bridges, and buildings, which Deere's products and services cater to as well.

Add it all up, and there's a big challenge up ahead for heavy machinery equipment makers. At the same time, this challenge simultaneously presents opportunity for companies such as Deere, whose products and services will be in high demand going forward.

Deere's emerging market presence is expanding, and will continue to do so in the years ahead, now that its seven major factories will accelerate production. With Deere's new facilities completed, it's looking forward to accelerating production at these factories this year. This will allow it to meet the rapidly growing demand for agriculture equipment across the globe, for many years.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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