Strength in the agricultural industry is fueling rising demand for Deere equipment

“It was a good quarter. A strong start to the year,” said Josh Jepsen, Deere Chief Financial Officer, on a conference call with analysts. “The supply chain is showing early signs of improvement, but remains vulnerable.”

Deere, the world’s largest seller of farm equipment, said raw material and freight costs are down, though parts, labor and energy costs remain high. Deere has aggressively raised its prices to counter the high costs. The company said it expects price increases to ease later in the year as costs continue to fall.

Deere shares rose 5.8% to $426.63 in early trading as major US stock indices fell slightly.

The manufacturer, based in Moline, Illinois, said higher prices accounted for about two-thirds of the $1.2 billion in profits from its large farm equipment business during the three months ended Jan. 29. Sales of large machines increased by 55% during the quarter from the same period a year earlier. Deere now said it expects large farm equipment sales in the US and Canada to grow 20% this year.

“Farm income projections for 2023 are solid and will continue to support demand for equipment,” said Rachel Bach, Deere investor communications manager.

Tightening supplies of corn and wheat have driven up prices, driving net farm income in the US to a multi-decade high. Global grain supplies have shrunk due to adverse weather conditions in some parts of the world and the Russian war in Ukraine, which disrupted one of the world’s largest grain exporting regions.

Farmers are expected to plant more this year to take advantage of high grain prices and offset higher costs for seed, fertilizer, fuel and other production costs.

Sales of Deere’s construction equipment rose 26% during the quarter and profits more than doubled, driven by higher equipment prices and increased production volumes, the company said.

Deere said it expects lower demand for construction equipment from the US residential construction industry this year to be offset by higher demand for infrastructure construction and from oil and gas and equipment rental companies.

The company said stocks of agricultural and construction equipment are tight at Deere dealers. Most of the equipment being built is for specific customer orders that are booked late in the year, the company said.

Deere said it now expects earnings of between $8.75 billion and $9.25 billion for the year, up from the $8 billion to $8.5 billion the company forecast in November.

For the quarter ended January 29, Deere reported net income of $1.96 billion, or $6.55 per share, compared to $903 million, or $2.92 per share, in the year-ago quarter. Analysts had expected the company to earn $5.57, according to FactSet. Deere’s earnings in the prior year period were squeezed by a contract ratification bonus paid to United Auto Workers union members after a strike that lasted more than a month, causing production volumes to fall.

Deere’s total sales, including the equipment business and financing division, increased 32% in the most recent quarter to $12.65 billion.

—Dean Seal contributed to this article.

Write to Bob Tita at robert.tita@wsj.com