By Bob Tita
Deere & Co. said the cooling of U.S.-China trade tensions was giving farmers more confidence to buy equipment.
Deere on Friday maintained its profit forecast for 2020 and reported better-than-expected equipment sales and profit for the latest quarter. The machinery company said it would continue to reduce expenses; last year, it cut production to reduce equipment inventories and initiated a voluntary layoff program for salaried employees.
The farm-equipment industry has been struggling through a six-year slump in the U.S. agricultural economy that has made many farmers reluctant to expand their fleets of tractors, harvesting combines and other machinery. China's tariffs on U.S. farm exports last year choked off sales of farm products. That further undermined demand for new farm machinery.
"We are encouraged by the early signs of stabilization," said Ryan Campbell, Deere's chief financial officer, during a call.
Deere's shares rose 8% to $179.80.
The Moline, Ill.-based company said it didn't expect to see the benefits from higher farm-products sales to China until later this year, when crops are harvested.
China has agreed to lift its tariffs on U.S. farm goods under the initial phase of a new trade agreement with the U.S. China pledged to purchase $36.5 billion worth of U.S. farm products in 2020. That would be the most ever bought in a single year -- and significantly higher than Chinese importers bought in 2017 before the retaliatory tariffs in response to U.S. duties on imports from China.
The planned huge increase in purchases has attracted skepticism about whether China actually will be able to reach the targeted level. Higher demand for U.S. hogs is expected since China's pork industry has been hobbled by an outbreak of African swine fever. But the spread of coronavirus in China will likely curb demand for other farm products as businesses were closed and residents quarantined in recent weeks.
Deere, the world's largest seller of farm equipment by sales, said its factories in China had been affected by closures, putting pressure on the company's supply chains. Deere depends on plants in China to supply components to plants elsewhere. The company predicted it would have higher freight costs for expedited shipments of components from China to mitigate the disruption in its supply chains.
Sales of Deere's farm and landscaping equipment fell 4% during the most recent quarter from a year earlier, but operating profit improved 7% on a higher operating margin. Sales of Deere's construction equipment dropped 10%. Operating profit though plunged 59% from lower shipments and contracting margins.
Income from Deere's financing business decreased by 11% during the quarter as the company reported higher losses on the value of leased equipment returned to the company.
For the quarter ended Feb. 2, Deere reported net income of $517 million compared with $498.5 million a year earlier. Total equipment sales slipped 6% to $6.53 billion. Deere expects net income this year of $2.7 billion to $3.1 billion, unchanged from its November report.
--Amber Burton contributed to this article.
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