Deere to slash costs after trade war hits earnings

CHICAGO (Reuters) – Deere & Co. (DE.N) on Friday announced a review of costs after a combination of the U.S.-China trade war and bad weather dented its quarterly profits, forcing the company to trim its full-year earnings forecast for a second time in the past three months.

Investors cheered the decision to control costs, sending its shares up 3.1% at $148.07.

The Moline, Illinois-based company said it is assessing its manufacturing footprint as part of the cost structure review.

It will reduce production by 20% at its facilities in Illinois and Iowa in the second of half of the year. The cuts will impact the production of large tractors.

The cost control measures are estimated to result in $25 million in savings this year and will be a centerpiece of its strategy over the next three years, the company told analysts on an earning call.

The comments came after Deere’s production costs in the third-quarter shot up by 2 percentage points from a quarter ago. Yet despite its efforts, full-year production costs are projected to be above its previous estimates.

Deere now expects full-year net income of $3.2 billion on annual sales growth of 4%, lower than the income of $3.3 billion on sales increases of about 5% projected earlier.

“Concerns about export-market access, near-term demand for commodities such as soybeans, and overall crop conditions, have caused many farmers to postpone major equipment purchases,” said Chief Executive Officer Samuel Allen.

Rival agricultural machine makers AGCO Corp (AGCO.N) and CNH Industrial (CNHI.N) have also slashed production to keep inventory in line with retail demand.

The year-long tariff war between the United States and China has slashed the export earnings of American farmers. China imported $9.1 billion of U.S. farm produce in 2018, down from $19.5 billion in 2017, according to the American Farm Bureau.

U.S. shipments to China of soybeans, the country’s most valuable farm export, sank to a 16-year low last year as Beijing mostly shifted purchases to Brazil, leaving American farmers with surplus.

A record-wet spring, meanwhile, has devastated a wide swath of the U.S. farm belt and inflicted more economic pain on soybean and corn producers, particularly those whose fields were too wet to ever plant, dampening hopes of an improvement in farm income and equipment sales.

Deere expects industry sales of agricultural equipment to be about the same as last year in the United States and Canada, which account for 60% of its overall business. Sales in the region were earlier projected to be flat to up 5% earlier.

For the quarter ended July 28, adjusted profits came in at $2.71 per share, below $2.85 per share expected by analysts in a Refinitiv IBES survey.

Sales at its agriculture & turf segment, the biggest source of the company’s revenues, declined 6% year-on-year during the quarter. Overall, equipment sales were down 3%.