How the U.S.-China Trade Dispute Affects Caterpillar and Deere in 2019
How the Trade Dispute Affects Deere
One of the big victims of the U.S.-China trade dispute has been American agriculture. Before the dispute, China bought around a third of all U.S. soybeans. But the U.S. Department of Agriculture says that these sales have been reduced by nearly 95% because of Chinese tariffs. So, it would seem that this would dramatically affect Deere’s sales, as farmers should be less likely to buy equipment from the company facing such a drop in their own sales.
But Deere insists that the weakness in the U.S. soybean market has been offset by greater demand for other crops, such as corn, cotton and wheat. What’s more, warmer relations between the United States and China in recent months has led to greater purchases of U.S. soybeans in China.
The truth is that, regardless of what happens in the trade dispute, China needs soybeans. Even if they buy them from other countries, such as Brazil, U.S. farmers can still sell theirs to the markets these other countries once served.
Therefore, the trade dispute should not have such a significant effect on Deere this year.
How the Trade Dispute Affects Caterpillar
In October of 2018, during a quarterly earnings call, Caterpillar insisted that the U.S.-China trade dispute would not have a dramatic impact upon them. Jim Umpleby, who is the CEO of the company, indicated that China only accounts for 5-10% of the company’s sales.
But, because China’s economic growth is slowing, this has lead to falling demand (and prices) for oil and gas, which will likely result in a reduction of capital expenditure by those companies involved in mining and energy exploration. This affects Caterpillar because the company in 2019 is largely depending on spending by these types of companies. Other companies involved in selling equipment to those in the mining and energy exploration fields have already indicated that their customers are being more cautious about spending.
Therefore, the trade dispute could have a significant effect on Caterpillar this year.
The Bottom Line
For those investors who are worried about the U.S.-China trade dispute in the coming year and how it affects China’s economic growth, Deere is a better stock choice than Caterpillar. Regardless of how the dispute unfolds, China will still need soybeans, and because there are only so many soybeans in the world, U.S. farmers will still be able to sell theirs somewhere.
Though, if you are willing to bet that the trade dispute gets resolved soon and that China’s economy recovers, Caterpillar may still be a good purchase. Perhaps an even better purchase than Deere.