Special Report: How the Weather is Changing Agriculture

In a note to investors, Henry Kirn, analyst for UBS Investment Research, said if past history holds true, equipment sales in 2013 could surprise. According to Kirn, John Deere’s performance during the 1988 drought implies potential outperformance in the second half of this year.

“While investors are concerned lower yields could have negative impact on equipment demand, 1988 experience would suggest shares can outperform even when yields are drought impaired,” says Kirn. “For reference, Deere outperformed S&P by 26% in 1988 and corn rallied 48%, while U.S. row-crop tractor industry unit sales grew 1% in 1988 and 28% in 1989.

“Changes in corn prices have been a reliable coincident indicator of Deere’s relative performance since the mid-1970s. Since 1977, corn prices and Deere’s performance relative to the S&P 500 have moved in the same direction on a year-over-year basis in 74% of quarters,” says Kirn.

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