Trade war, heavy rains weigh on Deere & Co.

cut its profit and sales expectations for the year as a trade war between the U. S. and China escalates and farmers try to recover from a planting season besieged by heavy rains.

Prices of soybeans, targeted by Chinese tariffs last year, fell to a 10-year low this week as the countries traded jabs.

“Ongoing concerns about export-market access, nearterm demand for commodities such as soybeans, and a delayed planting season in much of North America are causing farmers to become much more cautious about making major purchases,” Deere chairman and CEO Samuel Allen said in a prepared statement Friday.

The warning from Deere pulled the entire S&P industrial sector down on fears that the nation’s largest manufacturers will see similar damage.

Deere now expects to earn about US$3.3 billion in 2019, down from its forecast three months ago for profits of about US$3.6 billion. The company is less optimistic about revenue as well, lowering its forecast of a seven-per-cent increase to just five per cent.

Company shares slumped 7.65 per cent in New York trading to a new low for the year.

China has targeted U. S. farmers, particularly soybean farmers, in retaliation for tariffs put in place by the Trump administration. The effects of China’s actions have not taken full force in the U.S. farm belt.

Roughly 60 per cent of U. S. soybeans are shipped to China. But China doesn’t begin most of those purchases until the fall. It typically buys soybeans from South American nations during spring and early summer.

Yet the fight being waged across the Pacific is already hitting U.S. farms.

Despite the US$11-billion in relief payments that were doled out last year by the U.S. federal government, the personal income of farmers declined by US$11.8 billion through the first three months of 2019, according to the U. S. Commerce Department. A similar pace of decline is expected in the coming months, according to the Federal Reserve Bank of Kansas City.

And that is hurting Deere. Deere earned US$1.13 billion, or US$3.52 per share, for the period ended April 28, which is six cents less than industry analysts had expected, according to a survey by Zacks Investment Research. And it’s less than the US$1.21 billion the Moline, Ill., company earned during the same period last year.

Revenue rose to US$11.34 billion from US$ 10.72 billion. Adjusted revenue of US$ 10.27 billion topped forecasts.

Construction and forestry sales climbed 11 per cent to US$ 2.99 billion on higher shipment volumes and increased prices. It also benefited from the inclusion of Wirtgen’s sales for two additional months. Equipment operations sales increased five per cent to US$10.27 billion, while agriculture and turf sales climbed three per cent to US$7.28 billion.

‘It’s cyclical, stupid.” This rather blunt phrase is one of my most reliable rules of thumb when analyzing investment themes, since most headline-grabbing trends that are dubbed secular, disruptive or even paradigm shifts turn out to be cyclical in nature (that is, periods of prosperity are followed by contraction).

This theory has served me well over the years, but is being tested today when looking at corporate profits in the United States. Since the financial crisis, profit margins have risen to cyclically high levels and managed to stay there. This higher- for- longer trend runs in the face of economic theory, which suggests that high profits attract more competition and, as a result, should come back to normal levels.

It should also be noted that corporate profits are what drive stock prices and, companies, has been cheap and abundant. Costs have remained in check despite economic growth and low unemployment. Workers have not fully participated in the profit cycle due to technological advances and the continuing trend toward offshoring.

James Montier, a strategist at GMO, a U.S. asset manager, summed it up in a December 2018 report: “Whenever labour productivity outstrips real wages (adjusted for inflation), the result is a falling share of the GDP pie going to stayed low (or declined) due to government policies and ever- increasing cross- border creativity. And, so far, companies have not been required to fully pay for their impact on the environment.

The one factor that’s not talked about enough is consolidation. After three decades of frenetic merger activity, all industries have fewer players and many have moved into the oligopoly category (a state of limited competition).

Think about sectors that now have two or three dom