Daily Brief: Deere’s Fate Is Tied To The Economy, Which Is A Risky Business Right Now

Daily Brief: Deere’s Fate Is Tied To The Economy, Which Is A Risky Business Right Now

over 2 years ago3 mins

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Deere & Co. posted better-than-expected earnings late last week, as the company’s agricultural equipment became a must-have for a congested industry.

What does this mean?

Crop prices have been booming lately, and Deere has reaped the rewards: farmers have been spending more on its machinery to meet demand, bringing the company’s quarterly revenue and profit ahead of expectations by 11% and 16% respectively. And while that boom has started to taper off a little, it hasn’t dampened Deere’s optimism: the company hiked its earnings forecast for the rest of the year.

Deere earnings
Source: Deere

Why should I care?

For markets: Bellwethers work both ways.

Deere is considered an economic bellwether, with investors using its updates for clues about the state of the US economy. But it works the other way too, in that a weakening economy weighs on the manufacturer’s stock. Poor Deere: Goldman Sachs just lowered its US economic growth forecast, while Invesco’s broad index of commodities – which has moved almost in lockstep with Deere’s stock since October 2020 – has been on the decline. Investors, then, might be feeling a bit nervous about adding more of its stock to their portfolios.

Deere commodities
Source: CNBC

Zooming out: Little investor on the prairie.

And you thought your mid-pandemic purchases got weird: the US government estimates that around 30% of the country’s farmland is now owned by those who don’t actually farm themselves, with Bill Gates becoming the biggest landlord last year. Farmland rental offers a steady income, after all, and the land itself is likely to keep rising in value as it becomes more and more limited a resource.

Keep reading for our next story...

British Retail Sales Came In Weaker Than Expected

UK image

Fresh data out on Friday showed UK retail sales fell at their fastest rate since January, which isn’t exactly how this whole “recovery” thing is supposed to go…

What does this mean?

The amount of goods sold both online and in-store fell by 2.5% in July from the month before – a far cry from the 0.2% increase that economists had been expecting. That might not sit well with the Bank of England, which had been hoping the lifting of leftover pandemic-related restrictions in July would unleash a flood of pent-up demand. Then again, maybe it’ll stand by its earlier optimism: some analysts think demand is still very much there given how much UK households have saved over the last year, and they’re confident it’ll keep driving growth in the next few months.

Retail sales

Why should I care?

For markets: Good news, bad news.

Around 60% of the UK economy is driven by “household consumption”, so the worry is that these disappointing retail figures will lead to weaker-than-expected economic growth this quarter. On the other hand, it probably vindicates the Bank of England’s decision to ignore the recent spike in inflation and keep its economic support program going. If shoppers aren’t turning up in their droves, after all, there’ll be less pressure on manufacturers and sellers to quickly and dramatically increase their prices.

Fall back

The bigger picture: Morrisons is too popular.

The bidding war over British grocery store chain Morrisons escalated last week, with private equity firm CD&R raising its offer for the supermarket chain to $9.5 billion (and eclipsing Fortress Group’s $8.7 billion bid in the process). That helped push Morrisons’ stock up 4% on Friday, potentially having reassured investors that there is an appetite for retail firms despite the shaky data. And it’s easy enough to see why: the pandemic has given the grocery sector as a whole a new lease of life, and Morrisons comes with the added benefit of an extensive real estate portfolio.

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