DE 2024 Outlook Too Pessimistic?
DE set a low bar for 2024 agriculture expectations when it reported its
Q4/F23 results this past week. While DE reported a Q4/F23 earnings beat,
its F2024 guidance was below consensus expectations, indicating its F2024
Production & Precision Ag. segment net sales to be down 15%-20% Y/Y. On
a more positive note, the November Ag. Economists’ Monthly Monitor survey
results point to higher (vs. a few months ago) expectations for 2024 U.S. net
farm income (and corn/soybean prices), partly due to South American
weather concerns. We believe DE’s guidance has a limited read-through for
AFN or fertilizer companies.
Brazil – 2023/24 Soy Planting Still Well Behind Last Year, Negatively
Impacting Safrinha Corn Planting: Brazil soybean planting was 65.4%
complete as of November 18, 10.5 percentage points behind a year ago.
This could also hurt the Safrinha corn crop in Brazil (the safrinha corn crop or
second corn crop makes up ~70% of Brazil’s annual corn production).
Argentina - Grain Trade “Paralyzed”: Argentina’s grain trade is largely
“paralyzed” due to drought and farmers holding onto produce, anticipating a
devaluation of the peso under President-elect Javier Milei.
USDA Raises Forecasts For All Food Prices In 2024 Slightly: USDA
forecasts all food prices will increase 2.9% Y/Y (vs. 2023E of 5.8%),
restaurant prices 4.3% Y/Y (both slightly above 20-year averages) and
grocery store prices 1.6% Y/Y in 2024. This suggests consumers are still
paying considerably more for food vs. pre-pandemic levels, which could lead
to changes in consumer behavior (e.g., reduced meat consumption).
Potash – Brazil Weighing On Overall Market: U.S. Midwest prices and
U.S. NOLA prices were flat W/W and down 2% W/W to $405/st and $333/st,
respectively, while Brazil prices slightly declined for the second consecutive
week to $333/t. The key items we are watching include: 1) bearish near-term
sentiment in Brazil; 2) U.S. Midwest prices hold; 3) China October 2023
MOP imports up 108% Y/Y; and 4) expectations of imminent India contract?
Urea Prices Fall On Weak Demand: While U.S. Midwest prices remained
flat W/W to $425/st, U.S. NOLA prices were down 9% W/W to $299/st, Baltic
Sea prices were down 11% W/W to $295/t, and Black Sea prices were down
10% W/W to $300/t as buyers refuse to buy volume.
Methanol – Global Prices Moving In Opposite Directions: China and U.S.
spot methanol prices were relatively flat W/W at $252/t and $328/t,
respectively, while Europe prices were up 5% W/W to $360/t. In Europe,
prices strengthened on buying and ongoing shutdowns in the Americas and
Middle East (including MEOH’s Egypt facility), and slow local production.
Northeast Asian Caustic Stabilizes After Eight Consecutive Weeks Of
Decline: Northeast Asian prices rose 1% W/W to $348/dmt. Production
disruptions in the Middle East are forcing traders to buy more from northeast
Asia, temporarily lifting price sentiment.
DE set a low bar for 2024 agriculture expectations when it reported its Q4/F23 results this
past week. While DE reported a Q4/F23 earnings beat, its F2024 guidance was below
consensus expectations, indicating its F2024 Production & Precision Ag. segment net sales
to be down 15%-20% Y/Y. On a more positive note, the November Ag. Economists’ Monthly
Monitor survey results point to higher (vs. a few months ago) expectations for 2024 U.S. net
farm income (and corn/soybean prices), partly due to South American weather concerns. We
believe DE’s guidance has a limited read-through for AFN or fertilizer companies.
Deere F2024 Guidance Below Expectations
DE reported Q4/F23 EPS of $8.26 (consensus: $7.46), operating income of $3.03B
(consensus: $2.85B) and net equipment sales of $13.80B (consensus: $13.64). For the year
ahead, DE is guiding for F2024 (ending Oct 2024) net income of $7.75B-$8.25B (consensus:
$9.31B). DE expects F2024 Production & Precision Ag. segment net sales to be down 15%-
20% Y/Y (see Exhibit 1 bar/line charts for historical U.S. industry tractor/combine sales),
Small Ag & Turf segment net sales to be down 10%-15% Y/Y, and Construction & Forestry
segment net sales to be down ~10% Y/Y.
• Limited Read-through For AFN: We believe that DE’s F2024 guidance and outlook has
less of a read-through for AFN. We would argue that farmer ROIC is much better for
grain handling/storage equipment (low hanging fruit, especially in places like India and
Brazil). Further, AFN’s consolidated order book/backlog is in good shape (up 3% Y/Y in
Q3/23). Note that within DE’s Production & Precision Agriculture division, volume/mix had
a negative 36% Y/Y operating income impact in Q4/F23 (more than offset by higher
pricing). On the contrary, AFN saw a positive volume impact to revenue in Q3/23