Deere & Company Might Not Stay Cheap for Long

Strong long-term tailwinds will support the global agriculture industry for many years, which is extremely favorable for Deere & Company.

May 20, 2014 at 10:47AM

Agriculture is an industry with strong tailwinds going forward. The reason for this is simple. There are a lot of people on this planet, and there will be even more people in the future. And, as you can imagine, everyone has a few basic needs. One of them is food, which itself signifies the importance of agriculture.

That means great things for farm machinery maker Deere & Company (NYSE:DE). Global populations are truly soaring. In fact, fertilizer supplier Mosaic (NYSE:MOS) stipulated in its last annual report that the world's population is poised to hit 9 billion by 2050. That will put a great strain on food production, but so will the fact that there's only so much farmland available for development.

Also, when you consider that standards of living keep improving across the world, particularly in under-developed economies, it's plain to see the immense demand for agricultural products and services.

That's why the business environment in agriculture is ripe for the picking, and Deere will be right there to profit from these trends for many years to come.

Agricultural productivity is of critical importance
Mosaic further stated that the world would add 75 million people per year until 2050. Not only that, but rising standards of living will result in millions of new entrants to the middle class. That means populations will turn to more protein-based diets, and that will certainly put a stress on food production.

In fact, Mosaic estimates that farmers around the world will have to grow as much food over the next half-century as they have over the entire course of human history.

These conditions create enviable support for companies like Deere that service the agriculture industry. Some of these tailwinds are already starting to show up. For example, Deere noted in its second-quarter conference call that total farm cash receipts in the United States remain at historically high levels, at approximately $400 billion expected in 2014.

In addition, soaring global populations and increasing demand for food is extremely favorable to farming margins. Rising prices for beef and milk are supporting dairy farmers, and feed costs have actually eased in recent months. In addition, Deere management sees a steady global economic recovery afoot, and modest GDP growth in the United States this year.

These forces should combine to create a prosperous future for Deere, which is especially true in under-developed nations. Across the world, conditions are ripe for growth in the agriculture industry. For example, Deere expects subsidies in China to be supportive of agriculture, which reflects the government's commitment to productivity and increasing farmer incomes. And, in India, the monsoon season there should result in robust agricultural activity.

Agriculture not without its challenges
Despite these tailwinds, Deere is seeing some bumps in the road on the path to greatness. The most recent quarter was a disappointment, as revenue and earnings per share fell 9% and 4%, respectively. Deere realized lower shipment volumes, which was the primary contributor to its tepid performance.

Deere sees farm incomes being lower this year than last year, which is providing a near-term hiccup. That being said, the company has great things to say about the future of agriculture, and the investments it's making now in new products will cement its status as an industry leader.

Bag this Deere while you can
Deere's most recent quarterly earnings report was disappointing, as the company saw declines in both revenue and earnings per share. Deere is seeing some weakness in farm incomes this year, which is having an adverse effect on its business. At the same time, though, Foolish investing is all about identifying long-term trends. The outlook for the agriculture industry remains extremely bright, which means Deere might not stay cheap for long.

Populations across the world are increasing rapidly, and when combined with rising standards of living, there's an immense challenge facing global food production. This bodes extremely well for Deere.

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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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