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Deere & Company Earnings: Weak Crop Prices Starting to Bite

US Corn Farm Price Received Chart

Deere & Company delivered an acceptable set of third quarter results, but its guidance was disappointing and, on balance, the earnings report was a net negative. In common with many of its peers, Deere is seeing an ongoing divergence in prospects between its agricultural and construction based operations. The former is suffering due to falling agricultural prices, while the latter is gaining traction with an improving construction outlook.

Unfortunately, Deere's revenue and profit is heavily skewed toward the agricultural sector. For example, more than 81% of its equipment sales came from its agricultural and turf segment, with the remaining 19% coming from its construction and forestry segment. It's time to look more closely.

US Corn Farm Price Received Chart

US Corn Farm Price Received data by YCharts

Furthermore, the United States Department of Agriculture, or USDA, recently predicted that this year's U.S. soybean harvest would be the largest in history -- therefore putting pressure on prices with another key crop. This is all bad news for Deere, because farmers tend to cut back on spending when crop prices are low.

The second takeaway is the slight surprise that Deere didn't upgrade expectations for its construction and forestry segment. In fact, the company's management cited a few economic indicators that suggested a better outlook for the construction industry. For example, total U.S. construction investment is expected to increase by 4.3% in 2014 vs. a previous forecast of just 1.7%.

However, the decline in the outlook for housing starts in 2014 from 1.07 million to 1.05 million appears to have created some caution. Fools already know that the housing market has slowed in the first half, but conditions remain good for long term growth. It will be interesting to see what Caterpillar says in its next set of results, because it's relying on a better outlook from construction in order to offset some ongoing weakness in mining.

The bottom line

I will discuss Deere in greater depth in future articles, but for now the key conclusion is that weakening crop prices are hurting its agricultural sales -- investors should keep an eye out for developments in crop prices. It's disappointing, but it's also a facet of the industry and it's not necessarily a long-term trend. However, the company is scaling back production in line with the reduction in its outlook for agricultural sales -- a sign that it sees conditions continuing to weaken.

As for construction, it appears to be a case of conditions being ripe for an improvement, but a combination of weather issues and a slowdown in housing has forestalled any improvement -- at least for now.

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The article Deere & Company Earnings: Weak Crop Prices Starting to Bite originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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