Deere and Company Pricing Spineometer: 5 of 5 Vertebrae

Deere and Company, an agricultural, construction, and forestry machinery production company better known as John Deere, had a banner Q1 2023. Revenue increased 34% to $11.4 billion while earnings before interest and taxes increased 404% to $1.7 billion over the same period last year.

Price increases, mix improvements, and strong demand (volume) all drove this positive performance according to financial reports and the earnings call held on 17 February 2023.

Rachel Bach, Manager of Investor Communication, in speaking about the agricultural sector, stated: “The year-over-year increase was primarily due to favorable price realization and improved shipment volume and mix.” Her verbal claims were supported by a quantitative visualization of the Price-Volume-Mix-Cost Analysis in the accompanying slide deck.  See below and visit the JRPM for a derivation.

Josh Jespen, CFO, in talking about the positive impact of pricing on profits, added some clarification:  “It’s not a normal year-over-year compare. It’s really comparing 2 years’ worth of price increases.”  That is, in 2022 Deere was shipping 2021 and 2022 models at their respective pricing.  In 2023, they only shipped 2023 models with 2023 prices.

Many analysts asked about margins and pricing during their earnings call.  When asked directly about pricing power, Jespen replied “when we look at the impact of equipment on the P&L for customers is still a relatively small percentage.”  I interpret this to mean that Jespen is aware that Deere retains some untapped pricing power.

Deere is not without its own challenges.  Input cost inflation, supply chain disruptions, farmer profitability, commodity prices, currency fluctuations, and even government transitions can impact their profitability.  Yet pricing remains central to their business performance as indicated by the comments of the CFO and investor relations team.

Research into the quality of Deere & Company’s pricing team indicated a positive state of affairs.  Pricing professionals were identified with titles of analyst and manager but not director or vice president.  Pricing professionals worked on parts pricing, incentive programs, market pricing, and key account price management.  Pricing professionals were distributed geographically across the Americas, Europe, Southeast Asia, and elsewhere at the regional and country level.

The review of pricing at Deere and Company opened a few new inquiries: (1) It appears that Deere relies on annual price updates.  Though this practice is common in their industry, it is also observed that some machines and vehicles can have multiple price changes within a year.  We are not sure if Deere is prepared for such a contingency. (2) The absence of senior pricing professionals raises doubts regarding pricing program coherence and strategy development at Deere and Company.  This may be managed by people with a different title.  (3) Deere has launched data and prescription farming offerings that attempt to improve farmer yields and are priced on a per acre/hectare basis.  Though precision agriculture was raised in the earnings call, scant evidence was provided that the business model is driving the expected and potential adoption levels.

Given the importance and capability of pricing at Deere and Company as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of April ‘23.

Deere and Company Pricing Spineometer:  5 out of 5 Vertebrae.

DE (Deere & Company) rose slightly from 402 on the day prior to their earnings call to 416 one week later. 2022 revenue of $47.9 B with a 15% operating margin and P/E ratio near 15.

Currently, a 1% improvement in price would yield a 6.6% improvement in EBIT holding all else constant for Deere and Company.

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