Deere & Co. can afford to pay its workers more, and Wall Street knows it.
About 10,000 of the farm-equipment giant’s employees went on strike last week to demand higher pay and better health benefits. It’s the first major labor action at Deere since 1986. But investors and equity analysts appeared largely unfazed. Deere shares have declined about 3% in the week since the union workers overwhelmingly rejected a tentative wage increase agreement negotiated with the company by representatives of the United Auto Workers. The drop came during a period when the S&P 500 rallied and likely reflects concerns about less efficient production during the work stoppage. But the stock fell more on a single day in late 2019 when the company offered a gloomy earnings outlook.
The muted reaction makes sense: The rebuffed wage deal included material raises of 5% to 6%, but labor makes up a relatively small percentage of the costs Deere incurs to churn out product, and the affected employees represent less than 15% of the total workforce, Jefferies analyst Stephen Volkmann wrote in a report. So even a 10% increase in the contract terms at issue would have a minimal impact on margins. “Bottom line, we do not expect meaningful headwinds here,” Volkmann wrote.
Deere also has been remarkably successful at pushing through price increases for its products, a reflection of both its reputation for quality and investments in software-driven productivity enhancements that have resonated with farmers. Deere said in August that it was recording an 8% price increase on large agricultural equipment orders so far for fiscal 2022. “We do not expect the strike or any resulting wage increase to impact our long-term outlook for profitability for Deere,” Edward Jones analyst Matt Arnold wrote in a note to investors.
The well-publicized supply-chain snarls and labor shortages across the U.S. economy have given workers more negotiating power than they have had in decades. And they’re using it: Roughly 1,400 workers at Kellogg Co. cereal factories are picketing across four states, while unions representing thousands of Kaiser Permanente employees also have voted to strike. But at least in the case of Deere, these workers aren’t asking for more than the company can handle.
It’s in Deere’s interest to settle this pay dispute as quickly as possible. Deere officials know this: On Monday afternoon, the company said it had resumed negotiations with the union. Tight supply-chains and shortages likely mitigate the near-term impact of production disruptions from the strike, since rivals couldn’t steal away sales even if they wanted to. Case in point, agricultural equipment maker CNH Industrial NV last week said it was pausing output at a number of its factories in Europe because it can’t get the semiconductors and components it needs.
There is growing concern among economists that the mismatch in labor demand and interested workers may persist for years — if not linger permanently — as people settle into early retirement, stay home to care for children or simply re-evaluate how they want to live their lives. A bruising battle with union workers over a well-deserved pay increase isn’t going to be a particularly helpful recruitment tool in that environment.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies.