- John Deere will lower output at some production facilities by as much as 20% year-over-year in the second half of 2019 due to trade uncertainty and other agriculture industry stressors, said Director of Investor Relations Josh Jepsen on the company's first-quarter earnings call. Output reductions will focus mainly on large equipment in the North American market.
- Cory Reed, president of John Deere Financial, pointed to a lack of a trade resolution, plus wet weather conditions and African swine fever, as reasons to lower production, in order for Deere to "to end the year to position ourselves for 2020."
- Higher freight costs, including some air freight to bring in parts, unfavorable product mix and overall uncertainty, on top of upcoming decreased production volume, caused the OEM to lower its margin projections from 12% to 11% for the year.
"We’re not baking in trade resolution," Jepsen said on the call. Production cuts might not be so needed if the only issues troubling John Deere's customers were trade concerns — but they're not.
Global stock-to-use ratios, meaning the amount of grain in storage and not in the market, are historically high for corn and soy. Many storage bins have been full or near-full for months as farmers waited out the trade war for higher prices. With tension between the U.S. and China renewed this month, there's currently no end to in sight to that dynamic and nothing on the horizon to push prices up.
In addition to global trade conflicts, a pernicious disease, African swine fever, is culling swine populations in Asia enough to "significantly" affect demand for feed, further tipping the scales against U.S grain growers.
Wet weather in the Midwest and Canada has delayed planting seasons and therefore harvests and equipment purchases and deliveries. All of these factors taken together are propagating caution for the OEM. But executives emphasized these are near-term stresses.
"We do believe the drivers of replacement demand remain intact. I think what we’re seeing today is a bit of a pause as a result of the uncertainties that are out there, but we feel like those drivers are still there. And as we work through some of these short term uncertainties, you see the resumption of that replacement demand," said Jepsen.
Last week, President Donald Trump pledged to provide $15 billion in additional aid to farmers affected by Chinese retaliatory tariffs. Agriculture Secretary Sonny Perdue later said the total could be more like $20 billion, according to Politico, which also reported the details of the subsidy may still affect planting decisions for the current growing season. Ted McKinney, USDA's trade undersecretary said last week the aid would come in "days, not weeks or months."