Inflation Bites Into Deere

Deere's tractors and other farm machinery are selling like hotcakes, but the inflationary pressures that are boosting prices for its customers are also raising prices at it suppliers. Net result: narrowing profit margins.

Farm machinery maker Deere (nyse: DE - news - people ) upped its 2008 sales guidance on Wednesday as it posted lower-than-expected third-quarter earnings. The firm said that earnings in the three months through July 31 were hurt by high raw-material costs that would also sting in its fourth quarter.

Deere plunged 11.8%, or $8.19, to $61.28, as investors fretted about the recent miss. It dragged down rival Caterpillar (nyse: CAT - news - people ) by 3.9%, or $2.78, to $69.02, and smaller AGCO (nyse: AG - news - people ) also fell 4.4%, or $2.51, to $54.42, during morning trading in New York.

Earnings in the company's fiscal third quarter rose 7.0%, to $575.2 million, or $1.32 a share, up from $537.2 million, or $1.18 a share, during the same period last year. But analysts on average expected Deere to earn $1.36 per share.

Moline, Illinois-based Deere increased its fourth-quarter sales outlook to a 29.0% gain year-over-year, implying sales of $8.6 billion from the $6.6 billion previously expected and well above Wall Street expectations. Earnings guidance, however, remained flat, at $425.0 million.

Business has been booming for Deere and other farm-equipment manufacturers as commodity prices skyrocket and farmers scramble to boost crop yields. But the commodities boom has started to bite into Deere's bottom line, since it uses a lot of metal in its products, though company leadership is taking it in stride.

Chief Executive Robert W. Lane said that agricultural commodity prices had "moderated" and "remain quite favorable by historical standards and are continuing to provide strong support to farm incomes and to the sale of productive farm machinery worldwide."

On May 14, Deere said second-quarter income jumped 22.4% and sales rose 17.4% but the company's guidance for 20.0% sales growth in the third quarter seemed conservative to analysts and investors given the backdrop of soaring demand and high crop prices (See: Steel Kills Deere). Animal-feed companies, developing markets' emerging middle class and ethanol companies have helped push prices for corn, rice and wheat to new highs