El Niño’s Rebound Might Help Deere & Company Sales Next Year

Although Deere & Company (NYSE: DE) has cut its fiscal 2012 growth forecast, changing weather patterns in the western hemisphere may turn prospects for the world's largest maker of farm equipment higher in South America, a key market where sales are expected by the company to shrink this year by as much as 10 percent.

Sales are expected to be up in the U.S. and Canada by as much as 10 percent this year, as the U.S. faces the worst drought in a half century. While stocks in fertilizer companies have been rallying this summer on the expectation that farmers will take advantage of high commodity prices to grow as much as possible in the coming seasons, farm-equipment purchases will likely see a slowdown.

"Typically what we've seen in a drought is that it's not good for these manufacturers," said Adam Fleck, associate director of research at Morningstar. "It tends to draw farmers away from showrooms, so we see short-term headwinds for Deere and its competitors."

South America is a key emerging market for Deere and its competitor AGCO Corporation (NYSE: AGCO) of Duluth, Ga. After two years of dry conditions linked to La Niña periodic climate pattern caused by a multiyear cycle of Pacific Ocean temperature changes, wetter conditions are expected in the upcoming South American growing season. And that means farmers might be motivated to buy new equipment later next year.

"We're seeing the El Niño pattern forming in the Pacific. That usually leads to good planting and harvesting in South America," said Fleck. "The potential is there for them to take market share from the U.S., where storage is at record lows. This would also be good for Deere and its competitors like AGRO, which have been expanding heavily in the South American market."

On Wednesday, Deere issued a disappointing third-quarter performance with an earnings-per-share of $1.69, which was 34 cents lower than analysts' forecast. The company's share price subsequently lost over 6 percent of its value.

Deere CEO Samuel R. Allen said in the earnings announcement that the U.S. drought "could positively influence our outlook as it spotlights the need for John Deere's highly productive agricultural equipment."

Whether drought leads to more robust sales of farm equipment, one thing is certain: Rainfall and high crop output leads to greater demand for the equipment.

Climatologists also expect the La-Niña-to- El-Niño shift to bring more rain to the American Southeast, especially Georgia, which has been roasting under drought conditions for the past two years.

"Things appear to be changing now in the Pacific Ocean," says climatologist David Zierden at the Southern Peanut Growers Conference in Panama City, Fla., according to Southeast Farm Press. "Now we're starting to see warmer water extending from South America at along the equator. This could be signaling the beginning of an El Niño, which would be great news, leading to more fall and winter rainfall."