The Ag Paradox: Farm Incomes And Equipment Purchases Tank While John Deere's Stock Soars

Tyler Durden's picture

Last week we wrote about the U.S Department of Agriculture's latest biannual report of farm incomes which painted a very bleak picture for the American farmer.  In its first forecast for 2017, the USDA saw real farm cash receipts down 14% versus 2015 and 36% from the previous high set in 2012 as farm debt continued to soar and leverage surged to all-time highs.

Below is a summary of some of the key takeaways: 

Real farm incomes in 2017 are expected to sink below 2010 levels which represents a 36% decline from the recent peak and a 14% decline since 2015.

Farms

 

Meanwhile farm debt continues to rise at an astonishing rate...

Farms

 

While farmer leverage has spiked to the highest level since at least 1960.

Farms

 

And of course, lower incomes means less money to spend on shiny new John Deere tractors with equipment capex expected to decline 35% compared to 2015.

Farms

 

And finally, farmer returns have crashed to the lowest levels ever.  We're not sure about you but a 2.1% ROIC seems a "little low" even in our current rigged interest rate environment. 

Farms

 

In summary, farmers are making no money but are managing to barely stay afloat by adding a massive amount of debt and slashing capital expenditures.

Moreover, the summary above was seemingly confirmed recently when ISI released their latest data on North American sales volumes for tractors and combines.  Not surprisingly, January volumes were down anywhere from 20% to nearly 50% YoY, as they were for most of 2015 and 2016. 

Tractors 1

Tractors 1

 

Which leads us to our final point, which is, what exactly are John Deere investors seeing that we're not? 

DE

 

While we certainly understand the concept of investing in cyclical stocks at the bottom of their earnings cycle, we're somewhat less familiar with the strategy of completely pricing in a recovery multiple years in advance while continuing to buy those same cyclical stocks at all-time highs and peak multiples.

JD

 

That said, we're sure those multiples have room to get even "peak-ier" tomorrow when John Deere reports earnings...we can't wait to see efficient markets at work.

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AtATrESICI's picture

Buy that stock with the nearly free money. Then dump it.

Jäger's picture

They will beat by a penny tomorrow on falling revenue and DE will tack on another 2%

hedgeless_horseman's picture

 

They will beat by a penny tomorrow on falling revenue and DE will tack on another 2%

Fuck me.  You're probably right.

Drink?

philipat's picture

On a non-GAAP EPS basis after Buybacks, due to "Non-recurring charges" and record low assumed tax rate? Where have I heard that before?

mind reset's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

DavidC's picture

Oooh! On ZH for 1 week and 3 days! Super!

Fuck off.

DavidC

junction's picture

Must be some Chinese insurance company fronting for ChiCom investors is planning to buy up John Deere.

youngman's picture

no they just buy one and copy it....and they have..ask CAT

Wile-E-Coyote's picture

This is just a game of chicken, it doesn't matter a jot what the earnings are it's all about pumping the market up.

BlindMonkey's picture

Hey man!  Why don't you see it?

 

It is all about Deere capital that is making money hand over fist doing the financing!!!  FFS man.  It is all about the monthlys.  Didn't you know that?

BlueHorseShoeLovesDT's picture

If Caterpillar can soar, why not

Raffie's picture

Cat is the dead rotten Unicorn that is still farting rainbows.

So yes, Welcome Aboard JD.

G-R-U-N-T's picture

Both Deere and Cat are probably good buys, especially if Trump pulls off the infrastructure build!

Raffie's picture

Cat.. NO.. they I think 49 straight months of profit loss.

When the markets collapse I think Cat will have a hositle take over at which they will be sliced and diced and sold and become a faded memory.

G-R-U-N-T's picture

Errr....okay. Sorry, but I'm in with both Cat and Deere. 

Hal n back's picture

maybe goodbyes

 

CAT PE is 32ish--thats with 50 months of successive sales declnes and a run of profit declines.

 

If they can turn this around this company probably wil have a PE exceeding Netflix or Amazons.

 

Seriously I have learned a lot the last few years-there is no need to read financials, no need to lsten to conference calls, no need to do research.

all you have to do is invest your assets and pray you can get out before we have a sudden meltdown. Aat that point all you can do is watch and cry.

 

just for fun, how many advisors and letter writers will in 5 years claim they called the downturn to the day.

 

 

 

Mr. Schmilkies's picture

Oh deere, our corn flakes runneth over.  

Raffie's picture

Our GMO FLAKES... the corn cereal people are dieing for and from.

Jäger's picture

Overlay CAT and DE charts and their latest moonshots are identical

cherry picker's picture

It does not surprise me.  We always like to step on the producers of our essentials to living while paying jocks, actors wall street witch doctors millions.

People in urban areas must think the food is manufactured in China and imported :)

razorthin's picture

Look no further than the Fed as the source of any dislocations.

sinbad2's picture

What the investors are seeing, is John Deere sales outside  North America.

bluskyes's picture

New John Degree tractors are shite with their electronics and pollution control. Their sales will be strong, they need to replace the crap they sold 5 years ago.

hedgeless_horseman's picture

 

My 1955 JD 820 made in Germany still runs like a top.

I will never buy a new tractor.

But I ain't drilling seeds with GPS.

matermaker's picture

I was looking at restoring an old JD Van Brunt that is in one of the barns.  About that era.  An acre of an old school dent corn will still get you 80 bushels per acre.  20000#s of corn makes quite a bit of bacon and lamb chops off 5 acres. 

booboo's picture

Shiiiiit boy!... my first car was a 44 JD A. Fly wheel start state of the art

 

hibou-Owl's picture

My neighbour got a new "John expensive", the spare parts will probably bankrupt him.
Hydraulics valves and electrics what a piece of shit.

I've got an old Renault tractor, economical, easy to fix. Yes it takes me longer to do the hay but I don't have a monthly payment to make.

Tom Green Swedish's picture

Perhaps you should reference your other article about the patriots and what could possibly go wrong. Check out the Long Term chart on Corn futures lately? Yea they only go one year out max and their function is to stabilize prices in the near term. Then go alta vista population bubble for me. Then go look at other vehciles John Deere sells besides farm equipment. Then you can go trash this article.

Jäger's picture

I rarely see Deere construction equipment on construction sites any more- it's CAT, Volvo or Komatsu

bluskyes's picture

I would like to see those charts overlaid with the Financials of Massey Ferguson 

Misty 34's picture

Or Kubota and the lkes also.

northern vigor's picture

Who wants a MF in their portfolio? 

ebworthen's picture

The FED, what other answer does anyone need?

Endless money for the banks/insurers/corporations.

Farms fail?  So what!  John Deere will be bailed out by the FED/Treasury.

LN's picture

In John Deere green, on a hot summer night...

LN

 

stant's picture

In Kentucky ,cattle , horse farms are doing ok. Whisky too. But civil war is the talk.

 

dobermangang's picture

Milk is $1.29 a gallon at my local Aldis.  Eggs were 59 cents a dozen.  Very tough times for farmers.

RogerMud's picture

and the milk comes with RBGH for that extra kick.

northern vigor's picture

That store price is $12.90 per hundred weight. The December 2016 USDA milk price received  at the farm gate was $18.80 per hundred weight. It could be down now, but I couldn't find the January price. 

Your store is using milk as a loss leader.

Atomizer's picture

John Deere can wholesale inventory using overstock dot com. 

Anteater's picture

We had an old handcrank 'poppin John' they called it. Would not die, could pull a two-bottom through rocky ground like green grass through a goose. Had a tag along spring tooth harrow, and a side pull cultivator, sure was fun. Miss that.

It's probably a massive EU:USD short squeeze ahead of the eu market collapse b4 Feb 22nd

'Nobody could have seen it coming!'

2 to 4 trillion loss for banks expected depending if reputation is regained with huge impact on the world

EU BANKS LOSS OF 1 TRILLION EXPECTED MAINLY EASTERN EUROPE BAD CREDITS THAT ARE HALF OF THE WORLD

WITH 2 , 3 DEPOSITS ABROAD TO REFINANCE THAT ARE SOME 2 , 3 ADDITIONAL LOSS FOR 10 YEARS WITH ONE OR TWO LION JUMPS IN CREDIT RATINGS OF BANKS. WITH SOME 50 TRILLION ASSETS THE EU BANKING SYSTEM INCLUDING INTERNATIONAL BANKS OWNED BY EU IS HALF OF WORLD BANKING SYSTEM WITH 100 TRILLION GDP AND THAT MUCH BANKING ASSETS.

eu banks are some 5 days away from ending liquidity, then us may use some trillion us deposits and 2 , 3 days for open operations.

buyback is over as corporate and sovereign prices are close to crisis again. now the usa market may get by up to 100 bn per day eu  cashout deposits channeled to US$ stock exchange .

that means stock shares are bought by usa banks to create irrational exuberance for last week before EU default to see if miracle happens. all data are cheated and not significant for share prices in eu and usa

northern vigor's picture

Bill Gates must be bidding on JD again. It is harvest time for the billionaires and their charity foundations.

mary mary's picture

Doesn't John Deere also sell a lot of construction machinery?  Real estate has been hot.  I see new construction everywhere.  (I live in the South.)

farmerunder's picture

good point. Could there be a trade announcement coming that will suit US farmers? or maybe a bigger round of subsidies to suit US farmers (although i thought the bigger farmers were the ones who got the most), or maybe a new breed or crop variety that will shake up the energy market? there may be more to this than just this company, however as others have said below, it would be telling to see how other makers of machinery are performing.

newmacroman's picture

The new CAT. Guess who gets the deere John letter after a 60% gain and is now out of the Dow?

Make way for 60% more green (and yellar)

83_vf_1100_c's picture

Got 60 yrs of use out of our '52 Ford 8N before the block cracked which was my fault. You had to be careful brush hogging near a fence cause the non live pto being pushed by the hog couls put you thru the fence. I really like the new Kubota with a diesel engine and hydrostatic tranny. It's like driving a new car. Probably won't last 60 yrs but neither will I.

Fuck a JD, Chinese made tractors. I would hate to see Cat go down.

Bunga Bunga's picture

For the FEMA camp mass graves you need a lot of DE and CAT.

Manipuflation's picture

"Which leads us to our final point, which is, what exactly are John Deere investors seeing that we're not?"

I think I am past the point now where DE can sue me if I divulged a secret or two.  Let me start with this, I used to work DE in a really good paying job.  I ruined my career with DE because I supported Ron Paul and became a little to successful in doing so.  I was a liability.  All I had to do was say nothing but that is not me.  Trump is President now though. 

Tylers, what do you think the real answer to your own question is?  I know the answer.  What does DE do?  What assets does it have?  DE has the last fully operational foundry in the United States.  DE has the capibilty to create weapons of war that no one else has.  DE is not all about farming.  I have been to some facilities and I have seen much with my own eyes.  DE is incredibly effificient.  Even as management you are frisked and scanned to see one of the facilties.  I have never seen anything like it in my life.  Because DE splits up production between facilities the way it does, no one person of my past stature could ever figure out exactly what is being produced. 

DE produces parts for the military because they can make anything they want.  A .gov contract must be pending.  Even though they fired my ass, DE is the best operation I have ever seen.  Efficient and clean, no waste.  They are pricks though and can be unlike SHLD.LOL

Hope that answers your question.  DE should be at about $28 a share so the short is there if you are into that.  Who knows what Trump is up to though.