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Deere blames Trump's trade war for lower earnings, plans to scale back production 20% at major plants

Deere blames Trump's trade war for lower earnings, plans to scale back production 20% at major plants

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FILE: John Deere S780 and S790 Combines are seen at John Deere Harvester Works in East Moline.

Deere & Co. is scaling back production at some of its major North American plants, with heightened trade tensions and harsh weather hurting farmers' incomes and lowering equipment demand.

Moline-based Deere on Friday cut its full-year profit forecast. The agriculture-equipment manufacturer reported second-quarter earnings of $1.13 billion, or $3.52 per share. That's lower than the $1.21 billion, or $3.67 per share, reported during the same quarter last year.

The revised forecast is another indicator that farmers, and those in the Midwest in particular, are suffering the brunt of the Trump administration's trade battles. On Friday, the president sought to ease fears over the escalating trade confrontations by lifting tariffs on industrial metals with Mexico and Canada, and he has pledged another aid package for farmers hurt by tariffs. 

Deere said it lowered its forecasts because farmers aren't buying as much equipment. Farmers are worried about plummeting crop prices, international trade disputes and extreme weather events that have delayed planting, including here in Iowa. 

Deere's earnings were lower than Wall Street expectations, causing shares to drop more than 7 percent in afternoon trading. 

"Ongoing concerns about export-market access, near-term demand for commodities such as soybeans and a delayed planting season in much of North America are causing farmers to become much more cautious about making major purchases," Chairman and CEO Samuel Allen said in the report. 

On a Friday morning call with analysts, Josh Jepsen, director of investor relations, said in response to market dynamics Deere is reducing production in its agriculture business to levels below retail sales. Production will be lower at some of its large North American plants for the remainder of the year.

He said the changes are mostly affecting the production of large agriculture equipment, with its major plants shipping around 20% less than the previous year. 

Locally, Deere manufactures large agriculture equipment, such as combines and tractors, at its factories in East Moline and Waterloo. 

Deere spokesman Ken Golden said the company is not specifying where production cuts are being made, only that it plans to under-produce market demand in the second half of the year. 

"Production changes can be accomplished without changing the size of the workforce," Golden said in an email. "We have not announced any change in workforce."  

Deere lowered its earnings outlook to $3.3 billion for the year, down from the previous forecast of around $3.6 billion. It also lowered its expectation for revenue to increase 7%, now anticipating 5% growth.

Jepsen said in reporting the lower forecast and decision to cut production, Deere is not assuming a trade agreement will be reached in the second half of the year. 

"As a result, we're taking down production in an effort to calibrate our field inventory where we want to end the year for 2020," he said. "The 20% ... that's just as an example of our large ag factories, that's not broadly across the division, but on a production-unit basis. That's the magnitude we're seeing in a few of our larger facilities." 

The cuts come as the U.S. and China impose escalating tariffs on billions of dollars in imports, largely taking a toll on soybean farmers, as around 60% of U.S. soybeans are shipped to China. 

Soybean prices dropped to a 10-year low this week.

Deere isn't the only major agriculture manufacturer hurt by the trade war. Stocks of Caterpillar also are trading lower this year.

Jepsen said scaling back production is the first step in responding to the uncertain market. 

In the second quarter, worldwide revenue rose 6% to $11.34 billion, from $10.72 billion the same period last year. 

Deere saw improved sales in the construction and forestry division in the second quarter. Sales rose 11% to $2.99 billion, driven by higher shipment volumes and prices. 

Despite the lower forecast for the year, Ryan Campbell, chief financial officer, said the company expects a "full, gradual recovery" as challenges — including trade tensions, harsh weather conditions and lower equipment demand — are abated. 

"Although we did reduce our net income forecast for the year, the $3.3 billion we now forecast for the year would still be the second largest in our history. Our second quarter sales and revenues represent the largest second quarter in company history," Golden said in an email. "We believe more agriculture equipment customers are taking a pause in purchasing due to the short term uncertainties. We continue to believe that the long-term factors remain intact to drive higher sales."

The Associated Press contributed to this report.


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