Traders Prepare for Deere's Earnings Report

John Deere & Company, widely recognized for its green tractors and combines, has seen remarkable investment success since the pandemic's lows in March 2020. The company, which derives 60% of its revenue from agricultural equipment, has achieved a total return of nearly 231%, significantly outperforming the S&P 500 and Nasdaq-100 by 76% and 56%, respectively. This surge can be attributed to an agricultural equipment super cycle fueled by rising crop prices and favorable economic conditions. In 2022, corn prices averaged about $3 higher per bushel compared to 2020, translating to substantial revenue increases for farmers. For instance, a corn farmer could see an increase of over $500 per acre, which, combined with record-low interest rates, encouraged significant equipment purchases. This environment led to record sales for Deere, with net income margins rising from 8-9% pre-pandemic to approximately 14% recently. However, the favorable conditions that benefited Deere are now reversing. Current corn and soybean prices, along with interest rates, have returned to pre-pandemic levels, presenting new challenges for the company. As a result, investors may need to reassess their positions in light of these changes. For those holding Deere stock or considering a neutral to slightly bearish approach, a potential strategy could involve selling an upside call spread, such as the September $360/$370 call spread. This strategy could be executed for approximately $3.30, representing 33% of the $10 difference between the strike prices.