Deere (DE) Q2 2026: Construction & Forestry Sales Jump 29% as Portfolio Diversification Offsets Large Ag Weakness
Deere’s Q2 2026 results highlight the growing importance of its construction and turf segments, which delivered double-digit gains and margin expansion even as large ag continues to cycle at trough levels. With robust infrastructure spending and disciplined inventory management, the company maintained its full-year outlook despite persistent tariff and input cost headwinds. Investors should watch for signs of ag demand recovery and continued execution in construction as Deere pivots toward its 2030 growth ambitions.
Summary
- Construction and Forestry Outperformance: Segment’s sales and margins surged, balancing ag cycle softness.
- Inventory Discipline: Tight management of new and used equipment supports future replacement demand.
- Tariff and Cost Pressures Persist: Ongoing mitigation efforts and stable pricing limit margin erosion.
Business Overview
Deere & Company is a global leader in agricultural, construction, and forestry machinery, generating revenue through equipment sales, parts, and financial services. Its business is organized into three major segments: Production & Precision Ag (large-scale farming equipment and digital solutions), Small Ag & Turf (compact tractors, turf, and utility equipment), and Construction & Forestry (earthmoving, roadbuilding, and forestry machinery). The company also operates a financial services arm providing equipment financing and leasing to customers worldwide.
Performance Analysis
Deere delivered 5% year-over-year top-line growth in Q2 2026, with equipment operations margins reaching 16.9%—bolstered by a one-time $272 million IEPA tariff refund. Excluding this benefit, underlying performance was in line with expectations, despite higher production costs and persistent tariff headwinds, which remain a 3% drag on margins. Segment results were mixed: Production & Precision Ag sales fell 14% on lower volumes, while Small Ag & Turf grew 16% and Construction & Forestry surged 29%, both on higher shipments and favorable pricing.
Construction and forestry’s strength was driven by robust infrastructure spending, rental fleet replacement, and strong order books—now at their highest since April 2024. Small Ag & Turf benefited from a turf market recovery and resilient dairy/livestock demand, with operating margins above 20%. Meanwhile, large ag continues to cycle at trough levels, but disciplined inventory management and technology-driven product launches are positioning Deere for a future upturn.
- Margin Structure Diversifies: Double-digit margins across all segments, with Small Ag & Turf and Construction & Forestry offsetting large ag weakness.
- Tariff Impact Remains Material: Net tariff exposure unchanged at $1.2 billion annual run rate, mitigated by cost actions and refund tailwinds.
- Inventory Levels Improve: New and used equipment inventories, especially for high-horsepower tractors and combines, are down over 50% from cycle peaks, supporting future replacement demand.
Financial Services also contributed with improved spreads and lower credit losses, prompting a raise in full-year outlook for the segment. Overall, portfolio diversification and disciplined execution allowed Deere to maintain its net income and cash flow guidance for the year.
Executive Commentary
"The resilience of our team and the diversification of our business has enabled us to maintain our financial expectations for the current fiscal year while also setting us up well for the years to come."
Brent Norwood, Chief Financial Officer
"As an enterprise, we remain confident in our ability to bring increased value to customers and deliver structurally higher performance for Deere across the cycle."
Chris Seibert, Manager, Investor Communications
Strategic Positioning
1. Construction & Forestry as Growth Engine
Construction and Forestry (C&F), Deere’s earthmoving and roadbuilding segment, is now the primary growth driver, with net sales up 29% and margins at 14.8%. Robust infrastructure funding, data center construction, and a strong order book (up over 60% since November) provide multi-year visibility. Nearly all production slots for new excavators are filled, reflecting high customer confidence and channel strength.
2. Ag Segment Resilience and Innovation
Large Ag remains at trough levels, but Deere is maintaining low new inventory and making meaningful progress on used equipment reductions, setting up for a cyclical recovery. The company is accelerating product and technology launches, such as new 8R/8RX tractors, autonomy-ready equipment, and precision ag solutions—positioning for margin expansion and recurring revenue as markets recover.
3. Tariff Management and Sourcing Strategy
Tariffs continue to be a significant headwind, with $1.2 billion in annual costs, but Deere’s mitigation strategy focuses on cost reduction, resourcing, and local manufacturing. Approximately 80% of U.S. sales are produced domestically, with 75% of components sourced from U.S. suppliers. The company is avoiding customer surcharges and instead driving operational efficiencies and product localization.
4. Technology and Digital Adoption
Deere’s precision ag and digital platforms are gaining traction, with JDLink satellite connectivity expanding rapidly and strong renewal rates (over 90% for second-year cohorts). See & Spray technology continues to scale, delivering 50–60% herbicide savings and expanding to new crop types, while digital engagement in the John Deere Operations Center exceeds 440,000 monthly active users.
5. Disciplined Capital Allocation
Deere returned $635 million to shareholders in Q2 via buybacks and dividends, while maintaining elevated R&D and capital investment to support long-term growth and innovation. The company remains committed to a $20 billion U.S. manufacturing investment over the next decade.
Key Considerations
This quarter underscores Deere’s ability to offset ag cycle pressure through its diversified portfolio, while maintaining discipline on pricing and cost management despite a volatile macro backdrop.
Key Considerations:
- Construction Order Visibility: Order books in North America are filled well into 2027, with data center and infrastructure demand driving multi-year growth potential.
- Ag Cycle Bottoming: Management and dealer feedback suggest 2026 is the trough, with aging fleets and normalized inventories supporting a likely 2027 recovery.
- Tariff and Input Cost Management: Ongoing cost actions and localized production are critical to limiting margin erosion, as pricing discipline avoids passing volatility to customers.
- Technology Monetization: Expansion of precision ag features and digital subscriptions is driving higher renewal rates and stickier recurring revenue streams.
- International Market Share: Deere continues to gain share in South America, leveraging new product launches and strong dealer networks even in a down market.
Risks
Persistent tariff exposure and volatile input costs remain major risks to margin stability, particularly if global trade policy shifts further or commodity inflation accelerates. The ag recovery is dependent on geopolitical stability, policy support, and farmer profitability, while construction demand could slow if infrastructure funding or macro conditions deteriorate. Management’s ability to sustain pricing discipline and innovation investment is crucial to offset these uncertainties.
Forward Outlook
For Q3 and Q4 2026, Deere expects:
- Back-half revenues to exceed first half, with Q4 higher than Q3
- Most favorable cost comparisons and higher production rates in Q4, especially for large ag
For full-year 2026, management maintained guidance:
- Net income between $4.5 and $5 billion
- Equipment operations cash flow of $4.5 to $5.5 billion
- Segment margin and sales outlooks unchanged for ag, raised for construction and forestry
Management highlighted several factors that will drive performance:
- Continued construction and infrastructure activity supporting C&F segment strength
- Ag segment recovery tied to fleet age, inventory normalization, and policy support
Takeaways
Deere’s Q2 demonstrates the resilience and strategic value of its diversified business model, with construction and turf offsetting ag sector weakness and technology investments underpinning future growth.
- Portfolio Balance Drives Stability: Construction and small ag/turf strength allowed Deere to hold full-year guidance despite large ag cycling at trough levels.
- Margin and Inventory Discipline: Aggressive actions on inventory and cost structure position the company for improved replacement demand and cyclical recovery.
- Technology and Recurring Revenue: Expanding digital adoption and precision ag solutions are building higher-margin, recurring revenue streams that support long-term value creation.
Conclusion
Deere’s Q2 2026 results reinforce the value of a diversified portfolio, with construction and turf segments driving growth and margin expansion even as ag remains under pressure. Disciplined inventory management, cost mitigation, and accelerating digital adoption position the company to capitalize as the ag cycle recovers and infrastructure tailwinds persist.
Industry Read-Through
Deere’s results signal that diversified exposure to infrastructure and turf markets can significantly offset ag cyclicality for equipment manufacturers. The construction and forestry outperformance highlights the durability of infrastructure spending and data center buildouts, a trend likely to benefit peers with similar exposure. Tariff management and localized production are increasingly critical competitive levers, as global trade volatility persists. Rapid adoption of precision ag and digital solutions points to a structural shift toward recurring, higher-margin revenue streams—a theme likely to accelerate across the machinery sector as customers seek efficiency and input cost savings. Investors should monitor inventory trends, technology adoption rates, and policy developments as leading indicators for both recovery and risk in the broader industrials and ag equipment landscape.