Can Deere Plow Its Way out of the Woods in Fiscal 2Q16?
Purdue University’s agriculture economy barometer measures producer sentiment and the health of the agriculture economy based on a monthly survey of 400 producers across the US.
After a series of declines in the past few months, the index rebounded sharply from a reading of 85 in March to 106 in April. Components related to the computation of the index also reveal that producers’ overall outlook toward current and future conditions have improved. Notably, the index of current conditions increased from a reading of 77 in March to 105 in April, and the index of future conditions increased from 89 to 107 month-over-month.
Why have sentiments improved?
This upshift in sentiments followed the recent recovery in corn, wheat, and soybean prices after the sharp decline following the plantation report on March 31. The uptick was also led by timely rains in the Great Plains region. Favorable spring weather in the Corn Belt region, in contrast to weather challenges for corn cultivation in South America, has also encouraged US optimism toward prices and yields.
The worst may not be over yet
However, when asked about the financial situation of producers for the next 12 months, 76% of producers surveyed said they still expect bad times ahead. Agriculture leaders and industry executives have reaffirmed this sentiment. Nearly 90% of industry leaders said they were pessimistic about the agriculture economy for the next 12 months.
Overall, we might conclude that while yields are improving and farmers are producing more, low prices on produce are likely to keep farm incomes low. This means that the equipment sales of manufacturers such as AGCO (AGCO) and Deere (DE) are unlike to improve without a stimulus to farm incomes.
Investors interested in trading in the agribusinesses can look into the PowerShares DB Agriculture Fund ETF (DBA). Those interested in trading in dividend-based ETFs can look into the Vanguard Dividend Appreciation ETF (VIG). Major holdings in VIG include Microsoft (MSFT), with a holding of ~5.1%, and Coca-Cola Company (KO), with a holding of ~4.4%.
Now let’s analyze Deere’s farm machinery sales.
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