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Trade War Puts Deere in the Headlights

Brooke Sutherland
Trade War Puts Deere in the Headlights

(Bloomberg Opinion) -- Count Deere & Co. among the latest trade-war casualties.

The tractor maker cut its 2019 guidance on Friday and warned escalating U.S.-China trade tensions and a delayed planting season in America amid bad weather across the Midwest had made farmers more cautious about splurging on new equipment purchases. Lower demand for soybeans amid an outbreak of swine flu in China was another factor. Just a few weeks ago, smaller rival AGCO Corp. had actually raised its earnings guidance and boosted optimism that Deere would follow. But trade talks between the U.S. and China have since collapsed, with both sides increasing tariffs.

 

Deere now expects net sales of agricultural and turf equipment to rise by just 2% this year, down from an earlier growth forecast of 4%. Currency swings are also a factor here, with Deere now predicting a 3% hit to its revenue in that unit from market fluctuations.

While the focus Friday was rightly on Deere’s core agricultural-equipment business, the company’s guidance cut was broad-based and also extended to its construction and forestry division. Deere now says forestry sales could be flat this year, with the growth potential for the unit that sells tree fellers and swing machines capped at 5%. The company had previously forecast 5% to 10% growth for that business. In a presentation accompanying its earnings, Deere also shifted its economic forecast for total construction investment to flat versus a previous call for a gain. Deere CEO Samuel Allen cited the construction and forestry unit as an ongoing bright spot reflective of overall positive economic conditions, but it seems even that business isn’t immune to the sense of caution that pervaded the company’s earnings report this week.

The biggest risk from the trade war isn’t what the tariffs do to raw-material costs – although the profit margin for Deere’s agricultural equipment unit was weak relative to analysts’ expectations – but what the uncertainty does to demand. Inventories of agricultural equipment have swelled, with Deere blaming its weaker outlook in part on a need to clear out the pileup before pushing new products to its dealers. It’s a troubling data point that suggests some parts of the industrial economy may not be resilient enough to weather the extra cost pinch and unpredictability wrought by the tariffs.

To contact the author of this story: Brooke Sutherland at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

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