EV Makers Such As Tesla And Mitsubishi Could Disrupt Deere. Selling Tractors Isn't The Answer

Elon Musk might unintentionally disrupt Deere DE +0.70%'s main agriculture equipment industry.

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No, there is no hidden Tesla TSLA -0.42% (ticker: TSLA) plan to sell electric tractors. The issue is not the electric-vehicle company's intentions to construct robots that may handle a range of activities, including planting and harvesting crops. The difficulty for Deere (DE) and its investors is corn demand.

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The United States produces over one-third of the world's maize, amounting to around 15 billion bushels, or 380 million metric tons, every year.

More than 40% of the yearly maize harvest in the United States is used to produce ethanol, a fuel that is combined with gasoline to reach desirable octane ratings for the gas we use to fill our automobiles and other vehicles.

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Part of that maize demand is threatened by the introduction of electric vehicles, according to D.A. In a Friday report, Davidson analyst Michael Shlisky stated. Less ethanol is required when more electric vehicles are sold.

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Tesla was a pioneer in the electrification of automobiles in the United States, and it continues to be the global leader in EV sales. Of course, Elon Musk's firm would not be completely responsible for the drop in ethanol consumption.Several big automakers, like as Ford Motor (F) and General Motors (GM), are directing their efforts toward EVs, while a wave of start-ups are vying for a piece of the pie.

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Weakening maize demand from a shifting ethanol market would be a problem for the agriculture business as a whole: corn accounts for around 90 million of the roughly 250 million acres cultivated in the United States each year.

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This, of course, would be a problem for Deere. It is a major manufacturer of machinery used to prepare fields, grow crops, and harvest much of those 250 million acres. In fiscal year 2022, Deere's big agricultural equipment sector earned around $22 billion in revenue. Large-scale farming accounts for nearly half of Deere's operations, including finance. Over the same time period, AGCO (AGCO) earned around $13 billion in revenue.

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President Joseph Biden and the Environmental Protection Agency announced new automobile pollution regulations for the 2032 model year on Wednesday. They want around two-thirds of new automobile sales in the United States to be electrified by 2032. If that target is met, it would equate to 10 million to 11 million EVs sold every year.

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"This week's new EPA greenhouse emission limits for autos nearly need a far quicker EV adoption curve than many expected," Shlisky remarked. "Regulatory and political trends bias unfavorable for ethanol," according to the report.

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Deere did not reply quickly to a request for comment.

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Yet, this is a long-term problem. In the United States, there are around 280 million registered vehicles, trucks, buses, and motorbikes. Just around 1% of those are electric.

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According to calculations, even if 10 million EVs are sold each year, it will take until 2040 to reduce ethanol consumption by nearly one-third. As a result, the EPA targets threaten around 15 million acres of maize planting in about 20 years.While it is still a long way off, Shlisky believes it is a problem worth investigating.

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Yet, the threat posed by EVs to ethanol has no bearing on his Deere stock recommendation.

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"Deere is by no means doomed," Shlisky said, emphasizing that the company has plenty of time to react. "A corporation does not survive for almost 180 years if it is unable to adapt to changing times."

He rates the stock as Buy and has a $520 price objective. Deere shares are up 0.6% to $386.98 in Friday trade. The S&P 500SPX -0.38% is down 0.4%, while the Dow Jones Industrial AverageDJIA -0.58% is down 0.6%.

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So yet, other experts do not appear to be concerned about ethanol. In all, 70% of analysts covering the firm recommend the stock as Buy. The average Buy-rating ratio for S&P 500 companies is around 58%. Deere stock has an average analyst price objective of $479 per share.

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