Deere & Co. Reaps Benefits From Rising Commodity Prices

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Surging demand for farm equipment, fueled by rising commodity prices, lifted by 65% second-quarter profits at Deere & Company (NYSE:DE).

The world's largest maker of agricultural equipment said yesterday (Wednesday) that its net income for the quarter ended April 30 rose to $904.3 million on revenue of $8.9 billion. That compares to a profit of $547.5 million on revenue of $7.1 billion in the same quarter last year.

The steep rise of the price of such commodities as corn and wheat in the past year has enriched farmers around the world, allowing them to buy more farm equipment. Deere's farm machinery sales rose 24%.

"Deere has proven themselves to be the highest-quality company in the sector," Kent Croft, co-manager of the Croft Value Fund, told Reuters. "Farmers' balance sheets are in really good shape and probably will be for the foreseeable future. There is more demand for commodities."

The price of wheat rose 69.1% from the first quarter of 2010 to the first quarter of 2011; corn went up 73.8%.

Rising commodity prices figure to continue well into the future, driven by demand from the ever- growing world population. The United Nations recently revised its estimate for the global population up to 9.3 billion people as of the year 2050.

"Given this expectation for worldwide population growth, it's clear that the rise in global resources prices we've seen since 2002 is for real, and is likely to continue for the long term," Money Morning Contributing Editor Martin Hutchinson said in a recent article. "Oil prices, metals prices and -- above all -- food prices are likely to be much higher in 2050 (in terms of that era's overall purchasing power) than they are today."

As long as agricultural commodity prices remain high, farmers will remain flush with cash to spend on new farm equipment like tractors, combines and planters.

Accordingly, Deere raised its guidance for 2011 sales, which also include construction and forestry equipment, from the 18% to 20% increase it projected in February to an increase of 21% to 23%.

"Farmers in most of the world's major markets are experiencing solid levels of income due to strong global demand for agricultural commodities," Deere said in a statement. "Construction-equipment sales to independent rental companies are seeing growth, while world forestry markets are experiencing further improvement as a result of strong wood and pulp prices."

The Moline, IL-based company said its strongest sales for farm machinery came from the United States, Canada and Brazil. Deere expects sales of farm equipment in the United States and Canada to rise 5% to 10% this year.

Sales in Europe are also starting to pick up, Deere said. It expects sales to rise 15% in the European Union in 2011.

Construction and forestry equipment, though a smaller portion of Deere's business, outperformed its farm segment, rising 45% over last year despite lagging construction in the U.S. real estate markets.

Demand for heavy equipment in both segments also has been on the rise in developing countries such as India and China. Deere announced yesterday it plans to invest $80 million in a new farming equipment plant in China, its seventh facility there.

Samuel Allen, Deere's chairman and chief executive, said in February he'd like to double the company's annual sales to $50 billion by 2018, mostly by boosting overseas sales.

The only negative in Deere's report was a warning that the aftermath of the Japanese earthquake would shave sales by $300 million and profits by $70 million. Deere uses parts from Japan's Hitachi Ltd (HIT) to build its construction excavators.

The warning did little to curb some analysts' positive outlook for Deere.

"The global trends towards increasing food quality and urbanization should support strong earnings performance for years to come," Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York told Bloomberg News.

Despite the strong earnings report and positive guidance, Wall Street focused on lower-than-expected pretax profit margins and the possibility that Deere has sold so much machinery farmers may slow down purchases. Deere stock was down 1.5% in midday trading.

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