Good times aren't over yet for Deere

Implications: The secondary effects of the world-wide ethanol boom are starting to show up in increases in prices, and in earnings, of which Deere is an excellent example.  Expansion of sugarcane in Brazil is driving sales of Deere machines there, but the effects of the big US corn crop and record high commodity prices are yet to be fully appreciated in the US ag sector.  If combine sales are an indication, next quarter should be another very good one for Deere.

Analysis: Deere is an excellent example of one company that is benefiting, in a very big way, from the dramatic expansion in ethanol production, worldwide. 

The article notes the expansion of sugarcane production in Brazil as one demand driver for investments in new machinery for that industry.  It also mentions, in passing, the soy industry in Brazil, but profitability has just returned to that sector, and I have doubts that sales for the soy sector there account for much of their growth in sales.

Even more interesting for Deere is how much of a boost they will get from the record income year that many US producers have experienced from the crop just harvested.   With many producers showing net income-over-variable-costs-of-production from corn of over $500, that income is now in the process of being pumped into the ag economy, and farm machinery will likely receive a significant share of that spending.

Last week I visited with the owner of our local Deere dealer, considered to be one of the larger dealerships in the US, and he mentioned that as of last week, Deere was sold out of combine harvesters (for corn-soy-wheat) for the 2008 harvest, and was no longer accepting orders for the upcoming harvest, still 10 months away. 

Undoubtedly, a large number of those machines have been ordered by farmers with an eye not only towards their burgeoning bank accounts, but also their potential tax liability resulting from that record income, and are choosing to invest some of it in new green paint for their operations, in lieu of the IRS. 

The party is probably far from over for Deere.