Deere FY 1Q17 Earnings Call Notes

Joshua Jepsen

Farm income should be up slightly in 2017

“Before we review the industry sales outlook, let’s look at fundamentals affecting the Ag business. Slide six outlines U.S. farm cash receipts. Given the large crop harvest and consequently the lower commodity prices we’re seeing today, our 2016 forecast calls for cash receipts to be down about 5% from 2015’s levels. Moving to 2017, we expect total cash receipts to be about $367 billion, roughly flat with 2016. It is worth noting that net farm cash income, a good measure of farm business health, is forecast to be up slightly in 2017. You can see this information in the appendix.”

Chinese stocks have increased, but unlikely to be exported

“Chinese grain and oilseed stocks continue to increase in 2016 with supply, domestic production plus imports outpacing the demand. Chinese stocks of grains and oilseeds now represent almost half of the world’s stocks. Remember, these Chinese stocks are unlikely to be exported. That means the world market, particularly oilseeds remain sensitive to any production setbacks, major geopolitical disruptions or trade disputes”

There are signs that the market is nearing bottom

“Still, there are signs the large Ag market is nearing bottom. For example, the magnitude of the industry decline expected in 2017 is considerably less than that experienced in 2016. Also, the used equipment environment is stabilizing. The EU28 industry outlook is forecast to be down about 5% in 2017, due to low crop prices and farm incomes as well as the geopolitical risks mentioned earlier.”

Tony Huegel

Not burning inventories anymore

“I think as you think about new equipment – and where we’ve really talked about through 2016 and even in 2015 is as we ended the year, the target was to have inventories in line with our current retail sales environment. And so, the real difference this year is, we aren’t seeing a significant decline in that retail environment year-over-year as we had both in 2015 and 2016. And as a result of that we’re able to produce largely to retail demand. Obviously there’s going be puts and takes by individual products. But as you think about large Ag in total for the U.S. and Canada, we’re producing in line with retail, which does give us some year-over-year benefit obviously in our sales as we’re able to do that. So really the answer to your question would depend on what happens to the retail environment. In a year where you start to see the retail environment improving, that’s when we would consider starting to lift that inventory level in line with that. ”