(Bloomberg) Deere & Co. shares jumped to a record high on Tuesday, making it the best performing industrial stock this year, as investors bet on a surge in demand with the war in Ukraine creating a need for more agricultural production.
The farm-equipment maker’s stock rose as much as 3.3% to $436.28, and is on pace to close at an all-time high for a fourth straight session. The sharp rally in the shares since the beginning of Russia’s invasion of Ukraine nearly a month ago has led to a 25% gain this year, making Deere the top gainer in the 72-member S&P 500 Industrials Index.
“The read from investors is that higher global crop prices will spur more machinery demand in future years,” Barclays analyst Adam Seiden said, adding that the thinking is large equipment manufacturers like Deere’s focus on precision agriculture will be “more sought after as farmers try to reduce costs and their machines help achieve that.”
Prices of crops such as wheat and soybeans have soared in recent weeks amid fear of looming disruption for crop supplies from Ukraine. The war there has lasted almost a month with no resolution in sight. As a result, some estimate that Ukraine, which is a major exporter of wheat, corn and sunflower oil, may only plant about half a normal sunflower crop and a third less corn than last year. That reduced production will invariably cause prices to rise.
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Rising grain prices, however, is typically good news for farmers and farm incomes. And that, in turn, is good for agriculture machinery makers like Deere and AGCO Corp.
“High grain prices bode well for farm incomes, and elevated farm incomes are typically reinvested back into the farm, including machinery and grain storage,” Edward Jones analyst Matt Arnold said.
On the other hand, the gaps in the global crop supply created by the loss of the production capacity of Russia and Ukraine will also need to be filled. All together, it creates the perfect environment for a significant uptick in demand for farm equipment.
“Demand was strong already for equipment,” William Blair analyst Lawrence DeMaria said. “But higher prices and the need for more agricultural production suggest a longer cycle ahead.”
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