Deere & Co. (DE) Faces Continued Challenges Amid Agricultural Downcycle and Tariff Pressures

Deere & Co. (NYSE: DE), the world’s leading manufacturer of agricultural equipment, has faced a difficult operating environment over the past year, and its latest quarterly results offer little evidence of a near-term turnaround. While cost-cutting efforts allowed Deere to slightly exceed analysts’ Q1 2025 expectations, the broader picture remains troubling, with sales and net income dropping 35% and 50% year-over-year, respectively.

The agricultural downcycle, persistently high interest rates, and mounting trade tariffs continue to weigh heavily on demand. Investors had hoped for signs of stabilization, especially after the stock climbed 12% in early 2024 in anticipation of a potential turnaround. However, Deere's reaffirmed full-year net income guidance of $5.0-$5.5 billion—with no upward revision—dampened those hopes, sending shares lower.

A Breakdown of Deere’s Q1 Struggles

Despite its status as a market leader, Deere has been unable to escape the broader challenges pressuring the farming industry. The company’s core business segments all posted double-digit sales declines, highlighting how deep the current downturn runs.

- Production & Precision Agriculture: Sales of large tractors and combines plunged 37% year-over-year to $3.07 billion, closely mirroring the 38% decline seen in Q3 2024. Weak shipment volumes remain a key issue, as farmers hold off on major equipment purchases amid declining income and rising costs. Deere even lowered its full-year outlook for this segment, now expecting a 15-20% decline compared to its previous forecast of -15%.

- Small Agriculture & Turf: This segment, which includes riding lawnmowers and turf equipment, suffered even more, with sales plummeting 28% to $1.75 billion. A combination of higher interest rates, tighter consumer budgets, and a weak housing market has severely dented demand for home and commercial landscaping equipment.

- Construction & Forestry: Although this segment has generally been more stable than Deere’s agricultural business, it is also feeling the pressure. Lower residential and commercial construction activity due to high borrowing costs has softened demand for Deere’s construction machinery.

The tariff situation is adding another layer of uncertainty. The Biden administration's 25% tariff on steel and aluminum is expected to raise manufacturing costs, yet Deere’s 2025 guidance does not yet account for these impacts, leaving investors wary of further downside risks.

Inventory Reduction: A Glimmer of Hope?

Deere has spent the past several quarters aggressively scaling back production and managing inventory levels to align with reduced demand. This strategy is starting to show some signs of success, as excess inventory is gradually being absorbed. If Deere can continue this process, it could help stabilize pricing and prevent further margin erosion.

Another potential positive catalyst could come from a modest increase in farm income, which declined in both 2023 and 2024 but is forecasted to tick higher in 2025. If this materializes, it may encourage more farmers to reinvest in equipment, even if purchases remain below prior cycle peaks.

Looking Ahead: Key Factors to Watch

While Deere remains a fundamentally strong company with industry-leading technology and brand loyalty, several factors will determine whether the stock can weather the storm or faces continued downside pressure in the coming quarters.

1. Interest Rates and the Cost of Financing Equipment

High interest rates have been a major drag on Deere’s sales, particularly in its Small Agriculture & Turf segment, where buyers rely heavily on financing. The Federal Reserve has signaled the possibility of rate cuts in mid-to-late 2025, and political pressure for lower rates—especially from former President Trump—could accelerate this timeline.

- Lower rates would ease financing costs, making it more affordable for farmers and consumers to upgrade equipment.

- A delay in rate cuts, however, would likely keep pressure on Deere’s revenue and margins.

2. Farming Income and Equipment Replacement Cycle

Farm income has been on a downward trend, making it difficult for farmers to justify large capital expenditures on new tractors and combines. However, if commodity prices rise or government subsidies increase, it could spark a recovery in equipment demand.

Additionally, Deere has been launching upgraded tractor and combine models, featuring new automation and AI-driven technologies, including operator-free machinery. If these innovations gain traction, they could provide a long-term competitive advantage and attract more buyers when market conditions improve.

3. Tariffs and Rising Manufacturing Costs

Deere’s 2025 guidance does not yet incorporate the full impact of new U.S. steel and aluminum tariffs, which could further squeeze margins. If raw material costs spike and Deere is unable to pass those costs onto consumers, profitability could decline further.

- Investors should monitor management’s commentary in future earnings calls to gauge whether Deere will adjust pricing or absorb the increased costs.

Is Deere a Buy After the Sell-Off?

The recent decline in Deere’s stock price reflects legitimate near-term risks, but it also presents a potential opportunity for long-term investors who believe in the company’s ability to weather the agricultural cycle.

Bullish Case

- Industry Leadership: Deere remains the dominant player in agricultural machinery, with strong brand recognition and cutting-edge technology.

- Inventory Management Progress: If Deere continues reducing inventory levels, it could pave the way for a demand recovery once farm conditions improve.

- Interest Rate Relief: A Fed pivot toward rate cuts later in 2025 would make Deere’s equipment more affordable, particularly in the consumer and small agriculture segments.

- Long-Term Farm Equipment Replacement Cycle: Even in downturns, farmers eventually need to replace aging equipment—a reality that will drive future demand.

Bearish Case

- Prolonged Ag Downcycle: If farm income remains weak, Deere’s core customer base may continue delaying purchases, leading to further revenue declines.

- Tariff Pressures: Increased steel and aluminum costs could hurt margins unless Deere finds a way to pass costs onto buyers.

- Sluggish Construction Market: If the housing and infrastructure sectors remain soft, Deere’s Construction & Forestry segment may struggle.

Final Verdict: A Cyclical Stock with Long-Term Potential

Deere is facing a challenging macroeconomic backdrop, but it remains a best-in-class agricultural and construction equipment provider. While short-term headwinds persist, the company’s long-term fundamentals remain intact.

For long-term investors, Deere’s recent pullback could represent a reasonable entry point, but patience will be required, as the agricultural downcycle may not have fully bottomed out yet. Investors should closely monitor farming income trends, interest rate policy, and tariff developments to determine the optimal moment to capitalize on this cyclical opportunity.

Bottom Line: Deere’s stock may remain volatile in the near term, but for investors willing to ride out the agricultural cycle, the company’s industry leadership and technological advancements could make it a compelling long-term investment.