Sales of the company’s green-and-yellow tractors and harvesters fell a worse-than-expected 12 per cent during the second quarter ended on April 30, Deere said, but cost cuts, a lower-than-expected tax rate and improved margins in its construction equipment unit helped offset that weakness.

Deere also stuck by its full-year profit forecast despite growing weakness in Argentina, where it said import tariffs were hurting tractor sales, and Brazil, where contracting margins in the sugar cane industry were discouraging capital investment.

In the Commonwealth of Independent States, Deere said geopolitical tensions between Russia and Ukraine were disrupting farm credit in the region, putting the 2014 crop at risk.

The company said sales in Kazakhstan, Belarus and Russia were also hurt by import policies. It did not elaborate.

Sales in the region will fall “significantly” this year, Deere said. It had previously said they would be “down slightly.”

The company, the world’s largest maker of farm equipment, had already signaled that demand for its products would fall in most markets this year following a bumper crop that sent commodity prices down.

Lower commodity prices hurt Deere and its rivals because they shrink farm incomes and discourage investment in new equipment.

On Wednesday, Deere said the weakness would be greater than it expected, with sales of agricultural equipment down about seven per cent in fiscal 2014. Three months ago, it said it expected a decline of about six per cent.

“The execution was terrific during the quarter, but the signs of a cyclical peak are growing,” said Longbow Research analyst Eli Lustgarten.

Some investors hoped a rebound in construction demand, particularly in the United States, would help offset that softness for Deere, which also makes equipment for builders.

But Deere also scaled back its outlook for that industry on Wednesday. Although it held to the forecast for its own construction sales, it cut its expectation for total U.S. construction investment growth to a 4.3 per cent annual rate for 2014 from 6.3 per cent.

The company also reduced its forecast for 2014 U.S. housing starts by nearly 10 per cent to 1.05 million.

Deere posted a second-quarter profit of US$980.7 million, or $2.65 a share, down from $1.08 billion, or $2.76 a share, a year earlier. Analysts on average had expected $2.48 a share, according to Thomson Reuters I/B/E/S.

Revenue fell nine per cent to $9.95 billion.

— James B. Kelleher is a Reuters correspondent based in Chicago.

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Earlier this year, Deere, the world’s largest maker of agricultural equipment, lowered its outlook for fiscal 2013 revenue, saying a cooler-than-normal spring in North America had depressed sales. Some investors worried the softness was a sign of a new normal as corn prices have retreated from the all-time highs of last summer.

A number of analysts, including UBS, Barclays and William Blair, have cut their outlooks and share-price targets for Deere in recent days, citing concerns that farmers will slash capital spending as grain prices retreat.

Despite the earnings beat that was driven by its ability to pass price increases along to buyers of both its farm and construction equipment, the company did not change its full-year sales outlook.

William Blair analyst William De Maria said that results for the third quarter ended July 31, while impressive, suggested “the peak may have just occurred.”

Indeed, De Maria said while Deere raised its forecast for full-year earnings to reflect the earnings beat, the company’s outlook implied a lower fourth-quarter profit than many analysts were modeling going into Wednesday.

Moline, Illinois-based Deere also predicted farmers’ cash receipts from crop sales, which closely correlate with tractor and combine purchases, would fall four per cent next year. The receipts are already expected to be down eight per cent this year.

Like many analysts who cover the company, Adam Fleck at Morningstar said Deere’s “sales and earnings will decline next year” along with cash receipts.

Sales top estimate

Earnings in the most recent quarter rose to $996.5 million, or $2.56 a share, from $788 million, or $1.98 a share, a year earlier (all figures US$).

Analysts, on average, expected the company to report a profit of $2.17 a share, according to Thomson Reuters I/B/E/S.

Total sales, including revenue from the company’s financial services unit, rose four per cent to $10 billion. The analysts’ average estimate was $9.1 billion.

In a statement, CEO Samuel Allen said the nearly 30 per cent jump in earnings per share reflected “considerable strength in the farm sector, especially in North and South America.” That offset continued weakness in sales of its earth-moving equipment to builders.

But Allen also sounded a note of caution, saying Deere was “keeping a close watch on costs and assets.”

For decades, corn prices hovered between $2 and $3 a bushel, but surged as high as $8.49 during last summer’s drought, driven by demand from China and other emerging markets as well as by corn-based ethanol use in the United States.

But the surge in grain prices also triggered a sharp increase in production in the rest of the world as farmers scrambled to take advantage. Now with the prospect of a record global harvest, commodity prices have skidded lower.

Since tractor and combine sales go up and down along with farm income, analysts expected growers will try to do more with less in the coming years and cut spending.

During a conference call, Tony Huegel, director of Deere’s investor relations unit, reminded analysts that current corn prices, while well off last year’s highs, were still strong from a historical standpoint and at “profitable levels for most farmers.”

— James Kelleher is a Reuters correspondent in Chicago.

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