Deere Could Drop More Due to Bumper Crops in 2016
Soybean and corn prices are important for Deere
Profits in the farm equipment business are largely tied to trends in the agricultural (DBA) economy. Farmers are more likely to loosen their purse strings for equipment purchases when they earn more money on their produce and make record profits. As a result, crop prices and farm income figures are key indicators for the agriculture equipment business.
Together, corn (CORN) and soybeans (SOYB) account for ~50% of the crop receipts in the US. Investors often look at the trends in these crops for potential warning signs of problems in farm equipment (MOO) players such as Deere (DE), AGCO (AGCO), and CNH Industrial (CNHI).
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USDA reports on crop acreage
The acreage statistics released by the USDA (U.S. Department of Agriculture) on June 30 reveal that despite huge stockpiles and sinking prices, farmers in the US have continued to increase the acreage for corn and soybeans. In March 2016, the USDA estimated corn acreage at 93.6 million acres. It revised the estimates upwards to 94.15 million acres—the third-highest planted acreage for corn since 1944. Analysts were expecting acreage to tread lower towards 92.76 million acres. In a quarterly report released on inventories on June 1, the USDA stated that corn inventories at 4.7 billion bushels were at the highest levels in 28 years. As you can expect, corn futures have crashed from their peak levels after the publication of these reports.
The USDA estimates soybean acreage to increase 1% over last year to a record 83.7 million acres. This was short of analysts’ expectations of 83.97 million acres. In the same report, the USDA stated that the area harvested for 86.6 million acres will likely be the third-highest grain acreage since 1933.