* Q1 share $1.20 vs 99 cents expected
* Q1 sales rise 27 pct to $6.12 bln
* Sees full-year 2011 net income $2.5 bln
* Shares rise 2.1 percent to historic high (Adds executive and fund manager comments, updates shares)
NEW YORK, Feb 16 (Reuters) - Farm equipment maker Deere & Co DE.N reported a much higher-than-expected profit on Wednesday and raised its full-year forecast, as high food costs drove farm investment in new machinery, sending its shares to a record high in midday trading.
Rising prices of food commodities including corn, wheat and soybeans have boosted farmers’ incomes, and in turn they can afford to buy high-margin machinery, especially in North America. More inflation since the start of 2011 is helping lift the outlook for the world’s largest maker of tractors and combines.
“Deere continues to do a great job at innovating and coming out with new products that are going to position them in Latin America, Asia and emerging markets,” said Oliver Pursche, president of Gary Goldberg Financial Services and co-portfolio manager of the GMG Defensive Beta Fund, which holds Deere shares.
“They’ve done a great job at improving efficiencies and margins, not just through cost-cutting. Couple that with continued supply and demand imbalances in the agricultural space and that bodes very well for a company like Deere.”
Deere’s shares rose 2.1 percent, or $1.95, to $95.57 in midday trading on the New York Stock Exchange.
Moline, Illinois-based Deere earned $514 million, or $1.20 a share, in the first quarter that ended Jan. 31, up from $243.2 million, or 57 cents per share a year ago.
Analysts, on average, expected a profit of 99 cents a share, according to Thomson Reuters I/B/E/S.
Sales rose 27 percent to $6.12 billion, including $507 million in revenue from financial services, compared with Wall Street forecast for sales of $567 million.
For a graphic, see r.reuters.com/cav97r
Machinery sales rose at a much faster pace in the United States and Canada than in other regions. Deere said it raised prices 2 percent. Construction and forestry machine sales, a smaller business for Deere, soared 81 percent and the segment swung to a profit.
It cited demand for high-horsepower machines, which offer higher margins, and forecast U.S. and Canadian sales would rise about 5 percent this year, marking an improvement from its November forecast. But Deere noted production issues related to emissions standards could dampen sales in the near term.
“Strong commodity prices are driving planted acres to some of the highest levels since 2003,” Deere investor relations executive Susan Karlix said on a conference call. “Good profitability creates an incentive for farmers to plant on every available acre.”
Deere forecast a rebound in Europe, Russia and surrounding farming regions. It also anticipates moderate growth in Asia.
The company forecast a full-year profit of $2.5 billion. Its November forecast called for a 2011 profit of $2.1 billion and analysts were expecting net income of $2.34 billion.
That forecast translates to earnings per share of about $5.90, according to J.P. Morgan analyst Ann Duignan. Current Wall Street forecasts are for a profit of $5.50 a share.
“It has true global reach in an environment that’s still very favorable to their end markets, the commodity outlook,” said Kent Croft, co-manager of the Croft Value Fund CLVFX.O, which owns shares of Deere, as well as those of Monsanto MON.N and Mosaic MOS.N because they benefit when commodity prices are high.
Recent protests in some countries were fueled in part by political anger over food costs, so pressure for ever-greater farm yields was likely to persist, Croft said. He added that a rebound in Deere’s construction machinery sales was “nice to see,” reflecting an expected construction turnaround.
Deere’s profit report marked a hat-trick for makers of farm machinery this quarter.
Rival Agco AGCO.N reported better-than-expected earnings last week, as North American markets recovered, but warned expenses would depress results in the current quarter [ID:nSGE7170D3]. CNH Global CNH.N also beat forecasts when it reported last month. [ID:nWNAB7259] (Reporting by Nick Zieminski, editing by Maureen Bavdek)