Food costs/Deere: supply bottlenecks disrupt normal price signals

You would have thought steep food prices would encourage higher farm productivity, relieving pressure on consumers. Instead, results from US tractor maker Deere on Friday showed how supply bottlenecks have been overriding normal market relationships.

The business, capitalised at $111bn, reported robust demand for new farm equipment. But it has struggled to keep pace with orders. Incomplete tractors awaiting parts have been piling up in factories. Semiconductors and other vital components remain in short supply.

Farmers with cash to invest in new equipment are having to wait for delayed deliveries of key machinery needed to plant and harvest.

Higher sale prices for grain have meanwhile been offset by spiralling input costs for everything from labour to fuel and from seeds to fertiliser. One estimate from the US Department of Agriculture predicts net farm income, a broad measure of profits, will drop 4.5 per cent to $113.7bn this year.

Deere’s third-quarter sales grew by a bigger than expected 22 per cent. However, net income came in below analysts’ expectations, rising just 13 per cent. The company also cut its full-year earnings guidance from a range of $7bn-$7.4bn to $7bn-$7.2bn.

Price hikes on equipment will help absorb some of Deere’s higher costs. Farmers will have to pass these on or scale back investment in fertilisers and the like, reducing crop yields. Either way, consumers can expect little relief from high food prices.

These have been elevated by a war in Ukraine that shows no sign of ending. Disruption to manufacturing supply chains was incubated by the pandemic but has been sustained by the conflict. For farmers, connecting factors between the two phenomena include higher energy and chemicals costs.

Extreme weather conditions have meanwhile disrupted farm outputs from Europe to the mid-West and Latin America. Recent data showing a slight slowdown in US consumer price increases have helped fuel a rally in Wall Street stocks. On the evidence of Deere’s results, claims that inflation may have peaked look distinctly premature.