Deere Q2 2026: IEEPA Refund Masks a Tougher Reality, But Construction Surge and Precision Ag Momentum Signal Structural Strength
Deere & Company Q2 FY2026 Earnings Call, May 21, 2026
Deere & Company reported second quarter fiscal 2026 results that beat the headline, but the beat came with an asterisk. A $272 million one-time refund on IEEPA tariff claims, filed and accepted by U.S. Customs and Border Protection, inflated equipment operations margins by nearly 2.5 points to a reported 16.9%. Strip that out and the underlying business delivered margins closer to 14.5%, which is still respectable given where large ag sits in its cycle, but investors should not mistake the headline number for a clean run rate.
The Tariff Math Investors Need to Understand
The mechanics of the tariff situation are more nuanced than the headline refund suggests. As CFO Brent Norwood and IR head Josh Beal explained on the call, the IEEPA tariffs were invalidated following a Supreme Court ruling, but that relief was quickly replaced by new Section 122 tariffs and adjustments to Section 232 tariffs. The net effect is that Deere's full-year direct tariff exposure remains essentially unchanged at approximately $1.2 billion, or roughly a 3 percentage point headwind to equipment operations margin. Net of the refund, the company now expects to pay approximately $900 million in tariff costs for fiscal 2026. The $272 million was a genuine cash recovery, not a reclassification, but the ongoing structural burden has not materially changed. Of the total tariff exposure, Construction and Forestry absorbs roughly 45%, Small Ag and Turf about one-third, and large ag approximately 20%.
Critically, Deere is not passing tariff costs to customers via surcharges. Norwood was direct on this point: "We are not surcharging our customers on tariffs. Instead, we are focusing on reducing our tariff exposure through cost actions, things like resourcing, reshoring, exemption submissions and ensuring USMCA compliance, and I have full confidence that we will largely counter the negative financial impact of tariffs over the coming periods through cost measures." The company's implied net price realization for equipment operations is running 1.5% to 2% for the year, roughly in line with general inflation excluding tariffs, meaning tariffs remain a margin dilutant that cost actions, not pricing, are expected to offset over time.
Construction and Forestry Is the Standout Segment
The most important positive surprise in the quarter came from Construction and Forestry, where net sales surged 29% year-over-year to $3.79 billion and operating margins reached 14.8%. For the full year, Deere raised its C&F net sales guidance to up approximately 20% and lifted the margin outlook to a range of 10% to 12%. The order book for U.S. and Canada construction equipment is up more than 60% since November and is now at its highest level since April 2024, with over 80% of production slots filled for the year.
Norwood attributed the strength to a convergence of durable demand drivers: "Construction demand remains robust, supported by infrastructure spending, rental activity and accelerating data center investments." Data center construction alone is expected to top $100 billion in 2026 with additional double-digit growth into 2027, benefiting both large-scale site preparation and water and utility contractors. Road building markets, where Deere also raised its industry growth forecast to approximately 10%, are being fueled by elevated infrastructure spending across multiple geographies. The new John Deere excavator, built at a newly expanded facility in Kernersville, North Carolina following a $70 million investment, has nearly all of its production slots spoken for, an unusually strong leading indicator for a brand-new platform.
Large Ag Is Still at the Bottom, but the Setup for Recovery Is Improving
Production and Precision Ag net sales declined 14% year-over-year to $4.503 billion, with an operating margin of 15.7%. The segment outlook for the full year remains down 5% to 10% with margins guided to 11% to 13%, unchanged from prior guidance. Deere is explicit that 2026 represents the trough of the large ag cycle, and the inventory data supports that view. New field inventories for high-horsepower tractors and combines in North America are down more than 50% from their mid-2024 peak. Used inventories, which have acted as a structural governor on replacement demand, are also moving in the right direction. Model year 2022 and 2023 8R tractors, the most problematic cohort given they represented peak production years, are now down approximately 45% from their peak levels a year ago. Sprayer inventory is down roughly 30% and planter inventory is down approximately 50%.
Early order programs for spring products, which set production for model year 2027, have just opened. Beal was careful not to overinterpret two weeks of EOP data, but noted: "Everything we've seen thus far would support our view that 2026 still marks the bottom of the ag cycle." The Waterloo large tractor order book is well into the fourth quarter of the current model year, and the back-half loading of large tractor shipments to North America, while unusual, reflects genuine order book construction rather than production push.
Brazil Is the Near-Term Risk, but Deere Is Gaining Ground
The most significant guidance change in the quarter was the reduction in South American ag industry expectations, now down 15% versus a prior forecast of down 5%. The culprit is Brazil, where farmers face a particularly unfavorable combination: spot exposure to higher fertilizer and fuel costs from the Iran conflict, elevated and sticky interest rates with reduced expectations for further cuts, a strengthening Brazilian real compressing export margins, and all of this arriving just as growers prepare to plant a new crop in September. As Beal explained, "Brazilians have more exposure to current spot prices" relative to North American and European peers who largely locked in inputs before the conflict-driven spike.
Despite the macro backdrop, Deere is gaining share across all tractor categories in Brazil and maintaining double-digit margins even at trough levels. Norwood offered context that should matter to long-term investors: "Machine hours are building and fleets are aging, which should support replacement demand once the market stabilizes." The Casa John Deere event in Brazil this quarter, with over 3,000 customers from 25 countries, marked the largest product launch in Deere's history in that country, exceeding the prior record set just a year earlier, with over 20 new product and technology solutions introduced across ag and construction.
Precision Ag Monetization Is Gaining Real Traction
The precision agriculture technology stack is generating data points that deserve closer attention from investors focused on the software and recurring revenue layer of the Deere story. See and Spray, the targeted herbicide application technology that uses machine vision to distinguish weeds from crops, covered 5 million acres globally in fiscal 2025, up from 1 million acres in its first year. Beal reported that the same customer cohort year-to-date is already spraying more acres than at the comparable point last year, and early EOP take rates for model year 2027 are tracking ahead of 2026 levels. The economics for customers are compelling and increasingly validated: "The technology is working. We're seeing an actual demonstrated, two years now, 50% to 60% savings on herbicide using the technology, and that is resulting in increased utilization for customers." Recent software updates have expanded crop compatibility to wheat, barley and canola, and Deere introduced See and Spray Green on Green capability for Brazil's next season, addressing a major use case in soybean-dominant markets.
Precision Essentials subscription renewal rates sit at approximately 70% overall, but the more telling number is the second-year renewal rate, which has crossed 90%. That cohort stickiness suggests the churn risk embedded in the headline 70% figure will diminish as the installed base matures. Connected fleet also continues to scale: more than 12,500 JDLink Boost satellite connectivity kits have been sold since the Starlink partnership launched in the second half of 2024, with 25% growth in the most recent quarter alone. Monthly active digital users on the John Deere Operations Center platform have reached nearly 440,000, with highly engaged acres growing faster than total engaged acres.
Harvest settings automation, which automates combine adjustments in real time, is seeing utilization above 60% in North American harvests. In Brazil, that figure exceeds 80%, which Beal cited as evidence that technology adoption and utilization in the region is not lagging but leading, further supporting the long-term growth thesis for South America.
Balance Sheet and Capital Return Remain Disciplined
Net income for the quarter was $1.773 billion or $6.55 per diluted share. Full-year net income guidance is maintained at $4.5 billion to $5 billion, supported by an improved financial services outlook, now guided to $860 million versus a prior estimate, driven by favorable fair value adjustments and improved credit loss provisions. Equipment operations cash flow remains guided at $4.5 billion to $5.5 billion for the year. During the quarter, Deere returned $635 million to shareholders through repurchases and dividends. The company continues to target $20 billion in U.S. manufacturing investment over the next decade and reiterated confidence in its 2030 Leap Ambitions, with all three business segments operating at different points in the cycle but all delivering double-digit operating margins simultaneously, a meaningful structural improvement from prior cycle comparisons.