Deere outlook overshadows Q3 beat; shares fall

* Fiscal 3rd qtr better than expected

* Full-year forecast implies disappointing 4th qtr

* Shares down more than 3.5 pct (Recasts; adds details from conference call, updates shares)

By James B. Kelleher

CHICAGO, Aug 19 (Reuters) - Deere & Co (DE.N) warned on Wednesday that it would barely break even in the current quarter as continued weakness in its construction equipment business and sharp drops in overseas demand for farm equipment forced it to cut production by a third.

The news sent its shares down more than 3.5 percent.

The warning came as Deere reported a higher-than-expected third-quarter profit as better-than-expected performance in its core agriculture machinery business, as well as its in-house finance arm, helped to offset sluggish sales in construction and forestry equipment.

The world's largest maker of tractors and harvesters, which said it was taking "pretty significant shutdowns" during the quarter in anticipation of lower demand next year, reported a third-quarter profit of $420 million, or 99 cents a share, down from $575.2 million, or $1.32 a share, last year. Sales fell 24 percent to $5.89 billion.

Analysts, on average, had expected the company to report a profit of 56 cents per share on sales of $5.27 billion.

Analyst Eli Lustgarten of Longbow Research called the results "a clean beat," although 20 cents of the earnings came from nonoperating items, including a lower tax rate.

Moline, Illinois-based Deere reiterated its forecast for a full-year net profit of "approximately $1.1 billion."

Since Deere has already reported earnings of $1.1 billion for the first nine months of the year, the guidance implied a break-even or possibly even a marginally unprofitable fiscal fourth quarter.

"They're burying the fourth quarter with these production cuts," Lustgarten said. "And so their guidance is for a marginally break-even quarter."

During a conference call to discuss the earnings, Deere said the production cuts would result in one-third fewer production days during the quarter.

Because the fixed costs associated with those idled plants would not go away during the shutdowns, analysts warned, however, the company's actions were likely to pressure margins in the current quarter.

Analysts had expected Deere to report a fourth-quarter profit of 33 cents a share, according to Reuters Estimates.

Deere also cut its forecast for corn prices for the 2009-2010 crop year to $3.40 a bushel, down from a previous forecast of $3.80. That is up from its current price of about $3.12 a bushel, but down 59 percent from the record highs touched last summer.

Since farm equipment purchases are highly correlated with crop prices and the cash receipts they represent, that was likely to translate into less demand for the tractors and harvesters produced by Deere and its top rivals, Fiat Spa (FIA.MI) subsidiary CNH Global NV (CNH.N) and Agco Corp (AGCO.N).

With demand from farmers easing, that puts added pressure on Deere's construction and forestry unit, which competes with Caterpillar Inc (CAT.N), Komatsu Ltd (6301.T) and Terex Corp (TEX.N) and has seen demand drop sharply as a result of the worldwide downturn in building.

Deere shares were down about 3.7 percent, or $1.72, at $43.37 in late morning New York Stock Exchange trading. (