DE Deere and Co

By Bob Tita 

Farm-machinery maker Deere & Co. raised its profit forecast for the year by 33% on booming demand in South America, an unexpectedly rosy outlook that sent shares in agricultural equipment and supply companies up sharply.

Cash-flush farmers in Brazil and elsewhere in South America are expected to buy 20% more tractors and harvesting combines after record harvests this year, Deere said, even as industrywide sales are expected to fall 5% in the U.S. and Canada amid a multiyear slump in prices for corn, wheat and soybeans.

"South America is a growth market," said Joel Tiss, an analyst for BMO Capital Markets. "The profitability of farms is better because the costs there are lower. They get three crops a year, so the equipment is used much more intensely."

Deere raised its earnings forecast to about $2 billion for its fiscal year ending Oct. 31. The company expects revenue from farm and construction machinery to grow about 9% to $25.5 billion; in February, it had projected $24.3 billion .

Deere's bullish outlook marks a rare bright spot for an industry struggling amid a long downturn in the U.S. farm economy. The Moline, Ill.-based company said it still expects lackluster sales of its green-and-yellow tractors and combines this year in the U.S. and Canada, which accounted for about 70% of its farm-equipment sales last year.

The slump, driven by years of strong harvests that have produced record global grain stockpiles, is pushing some U.S. farmers to the brink of bankruptcy. That has left them with less cash to buy everything from seeds to combines, weighing on major agriculture-focused firms. Deere's farm equipment sales fell 36% to $18.5 billion in 2016 from a peak of $29.1 billion in 2013.

"We're not seeing significant changes in the outlook for our farmer customers," said Tony Huegel, Deere's director of investor relations. "It's hard to argue today for significant recovery in commodity prices."

Deere on Friday reported a profit of $802.4 million in its second quarter ended April 30, up 62% from a year earlier. Cost reductions helped draw that profit from a relatively modest 2.2% rise in farm and construction equipment sales overall. Total revenue including Deere's financial services business, rose 5% to $8.2 billion. Proceeds from the sale of a landscaping distribution business also boosted profit.

Deere said sales of farm and construction equipment in the U.S. and Canada fell 5% in its second quarter, while sales elsewhere in the world increased 14%. The U.S. dip came during what is traditionally the best quarter in that market, as farmers buy equipment to plant their spring crops.

Deere said used farm-equipment inventories in the U.S. are easing. That could allow its dealers to rebuild inventories of new machinery for sale by encouraging them to accept a trade-in to sell a new model.

Analysts had expected Deere's second-quarter results to reflect the continuing challenges in North America, so investors took their lead from the rosy profit outlook to drive Deere's shares up 7.3% to $120.90 on Friday.

Rival machinery makers and other agriculture-focused firms also got a boost. Shares of equipment makers Agco Corp. and CNH Industrial NV and fertilizer maker CF Industries Holdings Inc. all rose about 4%.

Austen Hufford contributed to this article.

Write to Bob Tita at robert.tita@wsj.com

(END) Dow Jones Newswires

May 20, 2017 02:48 ET (06:48 GMT)

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