Asharq Al-awsat English https://aawsat.com/english Middle-east and International News and Opinion from Asharq Al-awsat Newspaper http://feedly.com/icon.svg

Deere Proves It Can Afford to Give Its Workers a Raise

Deere Proves It Can Afford to Give Its Workers a Raise

Friday, 26 November, 2021 - 05:45

It’s a good thing for Deere & Co. that the company was able to come to an agreement with its striking workforce before the agricultural equipment giant reported its latest earnings. The update leaves no doubt that the company can afford to pay its employees a lot more.


Deere said on Wednesday that it earned $5.96 billion in net income for fiscal 2021. That’s a record and slightly exceeded the high end of the tractor-maker’s most recent guidance despite an Oct. 14 decision by more than 10,000 members of the United Auto Workers union to trade the assembly line for a picket line. The six-year agreement that the union voted to accept last week includes a 10% initial raise and is expected to result in incremental pre-tax costs of about $250 million to $300 million annually. That’s minor compared with the as much as $7 billion in net income Deere expects to generate next year alone.


It would have been understandable if Deere took a cautious view of 2022 given the strike and lingering supply-chain challenges that are crimping much of the industrial economy. That isn’t what it did; this outlook is the definition of robust. Deere forecast double-digit sales gains for each of its three equipment-related divisions as rising crop prices encourage farmers to replace aging machinery and the recently signed US infrastructure bill kicks off a wave of construction spending. The company is also flexing its pricing power, with an eye-popping 9% increase planned for its large tractor and combine unit next year. Investors liked what the company had to say; shares were up more than 5% in early trading.


In short, Deere is doing just fine and will continue to do just fine for the foreseeable future. That adds some context for why almost 40% of union members still voted against the latest wage and benefit package, the third brokered with Deere after two earlier deals were voted down. Those workers thought they had room to push for more. It turns out they were right. That may empower others considering a strike to be firmer in their demands. It also raises interesting questions about what will happen when the Deere labor agreement expires in six years. It’s impossible to predict what the economic environment will be then, but the feeling of being shortchanged isn’t one that’s easily forgotten.


And yet Deere’s latest results also help to explain why the company felt comfortable putting its foot down on a “best and final” proposal and saying it wasn’t going to make any more significant concessions. The strike was untenable long term, with farmers reportedly waiting weeks to get essential parts to complete the harvest season. But the work stoppage doesn’t appear to have weighed too heavily on Deere’s profitability in the short term. The recently ended quarter captured two weeks of the monthlong strike, and operating margins still climbed at Deere’s equipment-related divisions as higher volumes and price increases more than offset production cost bloat.


Presumably the early weeks of the strike were easier to navigate by relying on salaried employees and overseas factories than the latter ones, which will be reflected in the next quarter along with the higher labor costs. First-quarter margins will be in the mid-to-high single digits for the equipment operations overall amid inflation pressures, with the divisions most affected by the strike trending below that, Deere said Wednesday. Deere isn’t forecasting significant margin gains in 2022 for its large agricultural equipment and construction divisions, and profitability is projected to be flat or even wane slightly for the small tractor and turf unit. Robert W. Baird & Co. analyst Mircea Dobre says the operating forecast is likely conservative, though, because margins should improve as the year progresses, with supply challenges easing and price increases taking effect. The strike and other supply disruptions will shave only about a percentage point off what full-year 2022 margins might have been otherwise, Deere said. Perhaps this is one of those Goldilocks scenarios where everyone wins. It seems unlikely it will feel that way to Deere workers, however.


Bloomberg


Other opinion articles

Editor Picks

Multimedia