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.