The world's population is expected to reach nearly 10 billion people by 2050, increasing the global food demand by 50%. A strong outlook for the agriculture industry drove equipment manufacturer John Deere's (DE 0.37%) stock price up over the past several years, until disappointing quarterly results last week wiped away recent gains. But new technology rolling out now may ultimately help the company capitalize on rising farming costs and fuel further sales growth.
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Lowering farming costs
The USDA reports that as of April, year over year aggregate farming costs have increased 13% and the cost of chemicals have increased 17%. To address rising chemical costs, this spring John Deere announced its new See & Spray Ultimate technology, which uses machine learning to precisely aim herbicide directly at weeds. This technology evolved from a Blue River Technology lettuce bot, which identified in real time which plants to pick and which to leave after training the system from a library of images. In the field crop spraying format, the technology can drastically reduce the amount of herbicide; John Deere claims that targeted spraying can cut chemical use by two-thirds that of normal broadcast applications.
In January, the company unveiled an autonomous tractor that is now ready for large-scale production and should be available for retail later this year. The farmer configures a geofence around the field and a set of instructions, and the tractor then performs the operation using images and sensors to detect its surroundings. This will free up the farmer's time to work on other jobs.
These two advanced technologies have the potential to substantially reduce the cost of labor and chemicals for farmers. If labor shortages persist and chemical costs keep rising, these technologies will start to look more and more attractive to farmers. Meanwhile, the company believes that an aging fleet of farm equipment and sharply rising costs on used machines should bolster demand for its new equipment. While these advanced technologies are certain to be more expensive, high crop prices could go a long way toward justifying some extra up-front expense on equipment that promises to lower recurring farming costs.
Production woes
John Deere saw strong demand in the second quarter for its production and precision ag equipment with sales of $5.1 billion, a 13% year over year increase. Unfortunately, operating profit only increased 5% compared to last year, because higher retail prices were not enough to fully offset increasing production costs.
The company faces manufacturing challenges on a number of fronts. Costs for materials and shipping have risen, while component shortages have built up an inventory of partially complete machines waiting for parts. These widespread supply constraints have prevented John Deere, and the entire industry, from meeting the full demand for equipment.
Despite a strong sales forecast, the company sees these challenges persisting and dragging down overall performance for the year. John Deere has already taken some pricing action and intends to take more to help counterbalance rising costs. But the company books its orders well in advance and is already preparing for 2023 orders, which delays how quickly pricing action can take effect.
Despite its lackluster performance so far this year, John Deere should stay on agriculture stock investors' radar. The recent drop in stock price has brought its P/E to 18.8, below its five-year average of 22.3. It will take some time for the company to work through its supply shortages and for pricing to catch up with manufacturing costs, but a backdrop of global food shortages adds incentive for farmers to purchase equipment that makes farming more efficient.
