Deere (DE) is best known for its iconic green and yellow tractors, but today, it is the leading agricultural technology company. Much like other facts of life, farming is going digital, observes Scott Chan, contributing editor at Investing Daily's The Complete Investor.

The company’s Precision Ag technology creates an ecosystem that allows farmers to access planting data and control their farming equipment at their fingertips via a digital device such as a smartphone).

All the farmer needs to do is be a field general, analyzing real-time data and making adjustments (if necessary) to instruct the tractor to perform work autonomously, such as tilling, placing seeds and nutrients, and weeding.

Until this year, farmers still needed to be physically in the cab of the tractor as a failsafe, but in 2022 Deere has introduced its first fully autonomous tractor that can perform work without human presence, even overnight when farmers are sleeping.

This should enable farmers to become much more efficient, and complete their tasks and respond to changes in planting conditions much faster, thereby (hopefully) resulting in higher crop yield and more money in their pockets via higher output and lower costs. Deere’s long-term goal is to make everything it sells — that has a motor — fully autonomous, further driving crop yield improvements through innovation.

As usual, Deere beat expectations when it reported its quarterly earnings in May. However, net sales of $12 billion from its equipment operations (excluding contribution from financial services) was below expectations.

The company said that supply chain disruptions increased costs and also constrained what it could produce and deliver. Deere expects the situation to persist through the fiscal second half, which for Deere ends on October 31.

To be fair, in the current inflationary environment, many manufacturers are experiencing similar challenges. Encouragingly, Deere clearly still enjoys robust demand and has largely been able to pass higher costs to customers.

Moreover, as Deere points out, the prices of the farming machinery that it sells are actually growing at a smaller rate than the variable costs of other inputs farmers use, such as seeds, fertilizer, and chemicals. Deere machines help farmers do more with less so despite being a big-ticket item, the tractors can help farmers save on cost over time and achieve higher profit margins.

Thus, with favorable food pricing, it makes sense for farmers to make the investment. The knee-jerk selloff to the earnings release looks to be an overreaction. Deere remains one of the few companies well positioned to directly benefit from food inflation.

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