Deere's Prospects Look Bright -- Long Term

By MARK GONGLOFF Lower crop prices are welcome at dinner tables, but not at farms or companies that make their tractors. Deere, the biggest tractor maker in the U.S., is due Wednesday to report earnings for its fiscal third quarter, which ended in July. Analysts estimate Deere earned 57 cents a share, down 57% from a year earlier. The broader market will have an eye on Deere's outlook. For one thing, the company makes construction equipment that would benefit from a home-building recovery. Deere's lifeblood is farm equipment, generating roughly a third of revenue. Deere shares often move with the outlook for crop prices, which affect farmers' willingness to shell out for shiny, new combines. When the global commodity bubble burst last year, so did Deere's stock price, tumbling 74% from its January 2008 peak of $94.69 to a six-year low in early March. Commodities have recovered along with the outlook for the global economy, but crop prices have lagged behind. While Nymex crude-oil futures are up 55% year to date, soybean prices are up just 7%. That is a relief to food producers and might eventually benefit consumers, too. The Bureau of Labor Statistics reported Tuesday that crude food prices fell 6.1% in July. Deere shares are up 82% from their March low, trading near $45 and blowing the doors off the Dow Jones Industrial Average's 41% gain in the same period. The stock has been flat since May, however, and many analysts think Deere is fairly valued, particularly given the outlook for crop prices. The Department of Agriculture last week cut its outlook for corn and wheat prices this year and next. This year's plunge in prices could hurt tractor sales in 2010. But as long as China, the U.S. and other policy makers around the world continue to pump easy money into the system, it is possible the commodity bubble could reflate. There are more sustainable, fundamental reasons to expect food prices to rise in the longer term, particularly the growing appetite in China and other emerging markets for richer diets. Rising fuel prices also are reinvigorating demand for corn-based ethanol. Short-term bumps aside, Deere will likely sell many more tractors in the years ahead. Write to Mark Gongloff at mark.gongloff@wsj.com