Aug. 13 (Bloomberg) -- Deere & Co., the world's largest maker of farm equipment, dropped the most in nine days after reporting earnings that missed analyst estimates on higher steel costs and forecasting fourth-quarter profit below projections.

A $140 million increase in raw materials and freight costs pushed profit below estimates for the second straight quarter. Deere gets about two-thirds of sales from the U.S. and Canada and has been hurt by the worst U.S. housing slump in at least 17 years. Caterpillar Inc. and other construction equipment makers have used overseas demand to offset the slowdown.

Backhoe and excavator sales dropped 7 percent, overshadowing a 35 percent gain in farm equipment revenue. Demand for food and bio-fuels such as ethanol have lifted corn, soybean and wheat prices and given farmers more money to spend on tractors. Analysts expected Deere's high-horsepower equipment help the company post bigger gains like CNH Global NV and Agco Corp.

``Agco's and CNH's solid reports set the bar a little higher for Deere,'' wrote Citigroup analyst David Raso in a note today. He rates the stock a ``buy.'' ``Many investors are looking at Deere as an improving price vs. cost story for 2009.''

Deere, based in Moline, Illinois, fell $2.25, or 3.2 percent, to $67.10 at 4 p.m. in New York Stock Exchange composite trading. The stock has lost 28 percent this year.

The company projects fourth-quarter earnings will be about $425 million, below the average analysts' estimates for profit of $483.8 million, based on a Bloomberg survey. The quarter's profit will be hurt by the higher materials costs, increased taxes, more research and development spending and lower income from the credit unit, Marie Ziegler, director of investor relations, said on a conference call today.

3rd-Quarter Earnings

Net income for the quarter ended July 31 rose 7.1 percent to $575.2 million, or $1.32 a share, from $537.3 million, or $1.18, a year earlier. Analysts, on average, projected $1.37 a share. Sales of $7.74 billion, up 17 percent from a year ago, topped analyst estimates for revenue of $7.19 billion.

Before this year's profit misses, Deere had exceeded expectations in every quarter since August 2005. The stock fell 9.9 percent on May 14 after profit missed estimates by 1 cent and the company said at the time third-quarter earnings would be lower than analysts expected.

Competitors' Results

Duluth, Georgia-based Agco said July 29 that second-quarter profit more than doubled to $133.1 million, or $1.34 a share, topping analysts' estimates of 97 cents. Amsterdam-based CNH said July 23 that second-quarter earnings rose 52 percent to $347 million, or $1.46 a share, beating analysts' projections.

For the full year, Deere today forecast equipment sales will rise 21 percent, 1 percentage point above its May projection. The company said at the time that 2008 income will be about $2.2 billion. Analysts, on average, predict earnings of $2.22 billion and sales of $26.1 billion.

Chief Executive Officer Robert Lane, 58, is raising prices as much as 7 percent on large, wheeled tractors and 9 percent to 10.5 percent on 2009 combines to cover rising costs. It announced a 4 percent to 9 percent increase on construction and forestry equipment yesterday. The company expects to spend as much as $475 million more on materials this year than in 2007, down from a May forecast of $500 million.

``It is our intention to restore our price-to-cost ratio,'' Ziegler said. ``We are trying to get back to where we were at the beginning of this year.''

Construction and forestry revenue fell to $1.19 billion from $1.28 billion a year earlier as U.S. housing conditions hurt sales of backhoes and bulldozers in North America. Profit fell 38 percent to $93 million.

Construction Sales

Deere said construction sales will fall as much as 5 percent, down from a May forecast that called for a decline of as much as 3 percent. The company expects housing starts to drop to about 900,000 this year, a 60-year low.

``Construction is still weak,'' said Bill Batcheller, senior vice president at Butler Wick & Co. in Youngstown, Ohio. The firm manages about $925 million, including Deere shares. ``Did they get the bar low enough or do they have to ratchet down the forecast? Maybe there's room for a little more conservatism.''

Agriculture sales climbed 35 percent, to $4.54 billion, and profit rose 47 percent to $634 million, the company said. Demand for food and biofuels such as ethanol have buoyed prices of commodities, including corn and soybeans, driving sales of Deere's agriculture equipment to farmers with more money to spend.

Deere projects farm sales will climb 38 percent this year, led by a 40 percent industrywide gain in South America, where the company is adding products and sugarcane harvests are spurring growth. Industry sales in the U.S. and Canada are expected to rise as much as 25 percent.

To contact the reporter on this story: Courtney Dentch in New York at cdentch1@bloomberg.net.

Last Updated: August 13, 2008 16:35 EDT