May 16 (Bloomberg) -- Deere & Co., the world's largest maker of farm equipment, said second-quarter profit fell 16 percent and forecast third-quarter earnings that trailed analysts' estimates.

The shares fell 1.9 percent after the Moline, Illinois-based company said net income declined to $623.6 million, or $2.72 a share, from $744.6 million, or $3.13, a year earlier. Revenue grew 4.9 percent to $6.88 billion, Deere said in a statement.

Sales in the construction and forestry division decreased 12 percent to $1.45 billion, and Deere said U.S. markets will ``remain under pressure'' for the year. The company also cut its forecast for 2007 U.S. housing starts to 1.4 million from 1.5 million.

``Construction is very weak,'' said Igor Maryasis, a New York-based analyst with Prudential Equity Group Inc. He has an ``overweight'' rating on Deere and doesn't own any shares. ``Ag is just picking up momentum.''

Shares of Deere dropped $2.26 to $118.40 at 4 p.m. in New York Stock Exchange composite trading. They have climbed 33 percent in the past year and reached an all-time high of $121.76 yesterday.

The company forecast sales in the construction and forestry division will drop 11 percent in 2007, worse than the 9 percent decline the company projected in February.

Fifteen analysts surveyed by Bloomberg estimated profit of $2.42 a share in the period ended April 30. Revenue was projected at $6.34 billion, according to nine analysts in the survey.

Health-Care Unit

Deere's year-earlier second-quarter profit included $227.6 million from its discontinued health-care unit, which it sold in February 2006 for $512 million to UnitedHealth Group Inc. It set up the division in 1985 to provide coverage for employees and cut costs.

The tractor-maker projected third-quarter profit of $400 million to $425 million and said sales would increase about 5 percent. Analysts, on average, estimate earnings of $429.9 million in the quarter.

``There could be just a little bit of disappointment in the third-quarter outlook,'' said Stephen Hoedt, an analyst at Cleveland-based National City Corp., which managed about 915,000 Deere shares at the end of last quarter.

Deere today raised its forecast for 2007 net income to $1.55 billion from the $1.4 billion it predicted in February. The company also said full-year equipment sales will increase by 6 percent.

Farm Income

U.S. net farm income is predicted to rise 9.9 percent to $66.6 billion in 2007, the U.S. Department of Agriculture said in February. That would put it 16 percent above its 10-year average of $57.4 billion. Market prices for corn, wheat and soybeans this year are projected to remain higher than 2006 levels.

Operating profit at Deere's construction and forestry unit fell 30 percent during the quarter, hurt by lower sales volumes and rising raw materials costs for items such as plate steel.

``The spending from independent rental companies on our types of equipment is down significantly this year,'' Tony Huegel, manager of investor communications, said on a conference call with analysts and investors.

Deere increased its forecast for global sales growth in agricultural equipment to 13 percent for 2007, including about 3 percentage points from currency conversions. In February, Deere projected a gain of 8 percent.

South America

Revenue at the agricultural division increased 14 percent to $3.5 billion in the quarter. Renewable fuels and higher worldwide living standards boosted demand for corn and other commodities, raising prices.

In South America, the company projected agricultural- equipment sales will grow by about 20 percent this year, primarily because of improved conditions in Brazil. Previously, Deere forecast sales would be unchanged or increase as much as 5 percent.

``The Brazilian market is receiving support from higher commodity prices and strong demand for sugarcane,'' Deere said in the statement.

Sales in the commercial and consumer division were little changed at $1.32 billion. Deere boosted its forecast for revenue growth to 11 percent from 3 percent, including about $350 million of sales from lawn-care company Lesco Inc., which Deere acquired this month.

The unit's results will also be helped by new products, including EZtrak riding mowers. The lawn tractors allow the mower to spin in one spot to get around trees. A low end model costs about $2,899.

U.S. Corn Acres

U.S. corn acres will rise 15 percent to 90.5 million in 2007, the most since 1944 as demand for ethanol will consume 27 percent of this year's harvest, the USDA said on May 11. That's up from a 20 percent portion of the 2006 harvest.

Lane said on May 8 he expects more than 3 billion bushels of corn to be used in the U.S. for ethanol in 2007. He said the European Union has about 120 bio-diesel plants in production with an annual capacity of more than 6 million tons. This growth ``likely is just the beginning,'' he said.

To contact the reporter on this story: Will Daley in Chicago at wdaley2@bloomberg.net

Last Updated: May 16, 2007 16:31 EDT