Wall Street's frosty reaction on Wednesday to Deere & Co's latest quarterly earnings is no surprise given the recent sharp drop in agricultural commodity prices. Farmers buy fewer tractors and harvesters when corn and soybean prices are down.
But the dramatic drops in corn and other prices over the past year are not causing a lot of pain on the farms. At least not yet. With income at records highs, farmland fetching top dollar and balance sheets strong, a drop in grain prices in the face of another record crop is hardly a sign of doom for growers.
Lower prices are generating a lot of uncertainty around Deere, however. For the world's largest maker of tractors and harvesters, as goes the price of corn, so too goes the price of the company's shares.
Deere prefers to talk about the correlation between farm cash receipts and the sales of its distinctive green and yellow equipment. And it is true that the two move up and down in tandem. But the correlation between its stock price and the price of corn on the Chicago Board of Trade is pretty high, too.
That is why the last few years have been so good to Deere: Both corn prices and farm income were on a tear.
For decades, corn prices hovered between $2 and $3 a bushel, but they surged as high as $8.49 a bushel during last summer's drought. Supplies were tight, even as demand from China and other emerging markets increased along with rising corn-based ethanol use in the United States.
Net farm income has doubled over the past five years, according to the U.S. Department of Agriculture's Economic Research Service. Surging corn prices and rising production have been big factors.
Farm balance sheets are strong, too. Net farm assets have risen by nearly $700 billion since 2009, according to the USDA, while net debt has gone up by just $40 billion.
That is why the last few years have been so good to the top and bottom lines at Deere and its rivals in the farm equipment space, including Agco Corp (AGCO.N) and CNH Global NV CNH.N.
Between 2009 and 2012, Deere's farm machinery sales grew 60 percent and its diluted earnings per share jumped 270 percent.
Deere continues to benefit from flush farmers. In the results released on Wednesday, Deere said its profit jumped nearly 30 percent, even though sales were only up 4 percent. The company, in a nutshell, was able to sock it to farmers price wise.
But the company's shares, which have underperformed the broader market all year long, fell as much as 3 percent following Wednesday's report.
The disconnect is all about expectations. The U.S. Department of Agriculture on Monday forecast a record corn harvest in 2013, which pushed the price down to $4.55 a bushel, near a three-year low. Now farmers - notoriously conservative - are widely expected to cut back on spending for equipment and acreage, which have also spiked in recent years.
No one is expecting a catastrophic decline in the purchase of tractors, combines and other farm implements. Deere believes farmers' cash receipts will fall 4 percent next year after a sharper 8 percent decline this year.
Why would a 50 percent drop in corn prices result in a much more modest hit for farmers? Well, cash receipts are a function of both quantity and price. Corn was a lot more expensive last year, but the drought cut into yields. What's more, farm income can include all kinds of non-crop revenue such as government payments, and crop and revenue insurance. Farmers also have lots of storage capacity, so they do not have to sell at current prices. They can store their grain instead.
Add it up. Lower expected farm receipts + lower corn prices = double trouble for Deere shareholders.
That is why many analysts who cover Deere, including Adam Fleck at Morningstar, expect the next few years to be tough for the company.
"We're a far cry from the farm crisis of the 1970s and 1980s," said Fleck. "But the cold hard fact is farmers can always run a tractor one more year."
Lower corn and soybean prices, combined with the possibility of lower farmland values and higher interest rates, are coming together in a bad way for equipment manufacturers already facing several years of really difficult comparisons.
Unlike farmers, Deere does not have a bin where it can store unsold farm equipment. It can't stockpile tractors and combines and wait for the farmers to return. Deere, and perhaps its stockholders, might just have to tough this one out.