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Forget Crypto, Farming Is the Red-Hot Sector in 2021

By Lee Samaha - May 29, 2021 at 9:46AM

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Investors shouldn't overlook the growth potential in the agricultural sector, and John Deere stock in particular.

Investing in cryptocurrencies has its own merits, but it's not for the fainthearted, and it's not an asset class most investors should be constructing a portfolio around. Moreover, if you are looking for excitement, there are plenty of other themes or sectors to invest in. One of them, surprisingly, is the farming sector and specifically Deere (DE -1.43%).

Let's examine why the agricultural machinery company is a red hot-stock in 2021.

A person in a field holding a tablet with graphs and charts, representing digital farming.

Image source: Getty Images.

Deere's full-year guidance

Let's start by looking at management's full-year sales guidance. It reveals a company in full-on growth mode. An industrial company rarely fires on all cylinders simultaneously, but that's what's happening with Deere right now. It all comes down to a combination of factors that can be lumped together in three broad groups that we'll discuss below.

Segment

Net Sales Growth in 2021

Production & Precision Ag

25% to 30%

Small Ag & Turf

20% to 25%

Construction & Forestry

25% to 30%

Data source: Deere presentations.

End market outlook

First, Deere's core agricultural market is looking very strong right now. The chart below shows the recent strength in key crop prices like wheat, corn, and soybean. Moreover, farmers expect to benefit from the increase significantly. For example, the U.S. Department of Agriculture forecasts that U.S. farm soybean cash receipts will rise by $9.4 billion (24%) in 2021, and corn cash receipts are forecast to increase by $6.7 billion (14%).

It all points to a favorable end-market environment for Deere's key crop farming customers -- notably China, which has stepped up purchases of U.S. crops. It's a theme picked up by Deere's President of Production and Precision Ag, Cory Reed, on the recent earnings call: "In addition to higher cash receipts, U.S. customer sentiment has benefited from better market access over the last few quarters with elevated exports to China," he said. Furthermore, Reed said, " Given the positive environmental backdrop, order activity is up significantly and all of our large ag order banks are now complete through the end of the fiscal year."

US Corn Farm Price Received Chart

Data by YCharts

Industry dynamics are favorable

Not only are the macro-environmental factors favorable, but Deere has many company and industry-specific factors in its favor as well. The pickup in end markets comes at the right time as Deere develops its precision agriculture or smart farming solutions.

In a nutshell, digital technologies gather and analyze real-time data to help farmers prepare, nurture, and harvest crops. Their addition helps increase the average selling price of Deere's agriculture equipment, and the increased software sales imply an expansion in profit margin. Indeed, Deere expects to achieve a 7% increase in production and precision ag sales in 2021 from price realization alone.

Person inspecting wheat crop while on a video call with a lab technician.

Image source: Getty Images.

In addition, Deere's management believes that the demand cycle could extend beyond 2021 due to the high age of the U.S. fleet of agriculture machinery, encouraging a multi-year replacement cycle to kick in. Speaking on the earnings call, Director of Investor Relations Josh Jepsen noted that the large agriculture fleet was the oldest it had been in the last two decades.

Putting this point into context, the previous boom in farm equipment sales occurred in 2013 when, according to Jepsen, the fleet was "the youngest that it had been." As such, it's reasonable to expect the current upcycle to have more legs, provided that crop prices stay favorable.

Construction and forestry

Finally, Deere's non-agriculture businesses are in a very favorable state right now. North American construction equipment is forecast to increase by 15%-20% in 2021 due to the strength in the housing market, and the current strength in the price of oil might encourage improvement in oil and gas spending down the line.

Similarly, the strength in lumber prices encourages strong demand for forestry equipment, and Deere's management expects global forestry equipment sales to increase 15%-20% in 2021.

Two workers inspecting lumber.

Image source: Getty Images.

Will it last?

While it's tough to predict the pattern of commodity prices, it's safe to say that the underlying industry dynamics are favorable for long-term growth for Deere, provided crop prices (and farm income) stay at elevated levels. 

As such, Deere remains an excellent way to play the theme of rising crop prices and a way to protect your portfolio from the risk of surging commodity prices damaging the overall economic growth outlook. You won't get that from crypto.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Deere & Company Stock Quote
Deere & Company
DE
$364.69 (-1.43%) $-5.29

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