Replies to post #1191 on The Rising Influence of Rising Affluence

[DewDiligence]

DE (+4% today) is closing in on a post-recession high. This is the 2-year chart:



Merrill Lynch issued a bullish report today predicated, in part, on strong US corn prices. Also, competitor AGCO announced excellent 2Q10 numbers earlier this week (http://www.reuters.com/article/idCNN1921704120100727 ).

DE is one of the premiere beneficiaries of The Global Demographic Tailwind, for reasons that I don’t think need to be mentioned on a sophisticated board such as this one :- )

[DewDiligence]

Good news for ag-machinery companies such as DE…
Industrial Revolution Comes to Brazil’s Sugarcane Fields

http://www.reuters.com/article/idAFN2011868320100820

›August 20, 2010
By James Matthews

PIRACICABA, Brazil, Aug 20 (Reuters) - For nearly five centuries, the classic image of sugar production in Brazil has been one of workers setting cane fields on fire and then descending on the crop with their machetes for harvest.

No longer.

More than half of the cane in Brazil's main sugar-producing area of Sao Paulo state was harvested using machines during the 2009/10 season, a historic first that portends greater efficiency in coming years. The shift is occurring so quickly that some producers face a four-month waiting list to get the right equipment.

The transition, driven by both increased competition and tougher Brazilian environmental laws, has been a boon for multinational equipment manufacturers supplying the world's leading producer of sugar and the second largest ethanol producer after the United States.

"Brazil's market is hot," said Jose Emilio dos Santos, manager of Tratorag Comercio e Representacao, a John Deere dealer based in Piracicaba, the heart of the center-south's cane growing region in Sao Paulo state. "Many producers are looking to buy a new machine harvester."

Last year, Cosan, the world's largest sugar and ethanol producer, spent 30.5 million reais ($17.3 million) on mechanization and expects to train between 180 and 200 harvester operators per year for the next four years, said Luis Carlos Veguin, the company's human resources director.

Adoption of the technology by big firms has forced many smaller producers to follow suit. In the first six months of 2010, 3,186 harvesters of all types were sold in Brazil, up from 478 in the same period of 2006, according to figures from Anfavea, the vehicle manufacturer's association.

It's not just companies that are benefiting from the switch. Izaura Freitas Souza, 39, has wielded a machete in the sugar cane harvest since she was a 15 year old and once almost sliced off her big toe in the fields.

Today, Souza drives a harvester for Cosan in Piracicaba and says she has tripled her earnings to 1,800 reais a month, which allows her to save to buy a house. "It is clean work now," she said, "without the physical wear and tear."

THE COST OF MECHANIZATION

Initial investment in a harvester is expensive but over time is a cheaper alternative to manual labor because wages have been rising in tandem with Brazil's economy, Veguin said.

A new cane harvester from John Deere costs an average 880,000 reais [$500,000], said dos Santos, the tractor dealer. The company's main competitor in Brazil is Case IH, a subsidiary of CNH Global.

For smaller sugar cane producers who are unable to afford the initial investment, the situation can be dire. Unable to compete with the efficiency of the bigger players, some have been forced to enter into partnerships with Cosan or Bunge, or logistics companies, like Julio Simoes.

"Banks request guarantees and the cost of a harvester is quite high," dos Santos said. "Not all producers can provide sufficient collateral."

Mechanization is given urgency by environmental laws, which will effectively phase out manual cane cutting in Sao Paulo state by 2017.

Before manual harvesting begins, workers set fields alight to clear the undergrowth and flush out snakes and insects.

Reducing burning is a priority for producers because the method is a blot on otherwise impressive environmental credentials – Brazilian ethanol from cane is about six times more energy efficient than its U.S. corn-derived counterpart -- and they have introduced more stringent schedules.

"We have a 100 percent target for the elimination of burning (in areas suitable for mechanization in Sao Paulo state) for 2014," said Antonio de Padua Rodrigues, a director at Unica, the cane industry association.

EMPTY CANE FIELDS

Cane producers fear that environmental reasons might be used as de facto trade barriers to prevent the entry of Brazilian sugar and ethanol into less competitive domestic markets in Europe and North America.

This will be important as Brazil seeks to expand in overseas markets. The country's 2010/11 sugar cane crop will be the ninth record in a row, up 10 percent from the prior year, according to the government's supply agency, Conab.

But the worst hit by mechanization are the cane cutters, many of whom risk losing their jobs if they can't retrain.

A harvester replaces about 100 cane cutters a day, according to Unica, and creates 30 jobs by way of operators and maintenance teams. An operator trainee must be literate and hold a driving license, which excludes many cutters.

Although government and producers have stressed retraining, figures from Unica show there were 140,000 manual cane cutters in Sao Paulo state in 2010, down from 190,000 in 2006.

Even Souza, the harvester operator, misses the company in the fields. "During the breaks everyone would joke around," she said. "In the harvester I can only laugh at the memories."‹

[DewDiligence]

Deere Logs Solid FY3Q10 Results

http://finance.yahoo.com/news/Deere-3Q-profit-up-47-pct-on-apf-3631656907.html?x=0&.v=7

›August 18, 2010, 3:29 pm

Deere & Co. said Wednesday its third-quarter profit grew 47 percent because American and Canadian farmers bought enough of the company's large equipment to offset a sharp downturn in Europe, but Deere kept its forecast for the year conservative.

The company reported $617 million in net income, or $1.44 per share, in the quarter that ended July 31. That's up from $420 million, or 99 cents per share, a year ago.

Deere says global revenue spiked 16 percent to $6.84 billion.

Agricultural equipment sales in the U.S. and Canadian markets increased 19 percent in the quarter. Sales in other markets rose 16 percent, but that figure masks the European weakness.

"While we have benefited from positive conditions in the U.S. farm sector, particularly in terms of demand for large equipment, European markets are down sharply," Deere's Chairman and CEO Samuel Allen said in a statement.

European dairies and livestock producers are still recovering from losses of prior years, and rising crop prices will create new worries about feed costs for those businesses. And in eastern Europe and Russia, drought conditions and wildfires have hurt farmers. Deere officials also said used inventories remain at high levels in Europe, so sales of new equipment has been hurt.

Edward Jones analyst Jeff Windau said the weakness in Europe hurt Deere's results, but other markets are more important to the company in the long run.

"The real growth is happening more in South America and the emerging markets," [no kidding] Windau said.

Allen said Deere is performing well despite some challenging conditions. Deere's agricultural and turf equipment sales grew 12 percent in the quarter to $5.2 billion from last year's $4.7 billion. [The Ag & Turf segment comprises about 80% of DE’s overall business; construction & forestry equipment and the captive finance subsidiary provide the rest.]

Demand for construction and forestry equipment has improved from last year, but Deere said it remains well below normal. Quarterly sales for that division jumped 59 percent [from a very low 2Q09 base] to just over $1 billion from $632 million a year ago.

The quarterly results from the maker of iconic green-and-yellow farm and construction equipment easily beat Wall Street expectations. On average, analysts surveyed by Thomson Reuters expected earnings per share of $1.24 on $6.52 billion revenue.

Analysts praised Deere's performance, but were soured by the company's expectations going forward. Deere stock fell $1.17, or 1.7 percent, to $66.06 in afternoon trading Wednesday.

Sterne Agee analyst Lawrence De Maria said in a research note that Deere's guidance appeared conservative after the past two quarters of solid results. [I strongly agree.]

"We believe the underlying fundamentals for ag are exceptional, and anticipate continued strong operating performance and another solid year in 2011," De Maria said.

Jefferies & Co. analyst Stephen Volkmann said in a research note that Deere delivered a strong performance, but investors may be disappointed with the company's fourth-quarter forecast.

The company said it now expects its sales to grow about 12 percent in fiscal 2010. That prediction is in line with the 11 percent to 13 percent range Deere offered in May.

Deere also said it expects fourth-quarter net income to increase about 32 percent over last year to $375 million. Deere officials said fourth-quarter results will be hurt by higher incentive compensation and higher costs related to the company's efforts to comply with new emissions regulations that start to take effect in 2011. [the so-called interim Tier 4 standard]. Deere expects higher research and development costs in the fourth quarter and additional costs for upgrading its plants to produce the new equipment. Plus, raw materials costs are expected to increase in the fourth quarter.

Windau said even with the challenges Deere faces, he believes the company's fourth-quarter results may beat its cautious outlook.

Deere said it expects U.S. farm income this year to total $85.7 billion. That's up from the company's previous forecast of $81.5 billion. The amount of money farmers have is a key indicator of how much equipment Deere will sell.‹