Farm and garden equipment maker Deere & Co. (search) Tuesday said widespread drought in the United States caused an unexpected decline in quarterly earnings and forced it to cut its full-year forecast, sending shares down almost 9 percent.

In much of the U.S. farm belt, dry weather considered the worst drought in 18 years, has hurt near-term demand for Deere equipment among farmers, homeowners, and commercial lawn operators. The disappointing results weighed on shares of Deere rivals, including CNH Global (CNH), Toro Co. (TTC) and Agco Corp. (AG.

The downturn in demand came late in the quarter, and the company moved quickly to cut production, to prevent an inventory build-up before the introduction of new models later this year, executives said.

"We won't hesitate to curb production at the first sign orders are slowing," Greg Derrick, manager of investor communications said on a conference call with analysts.

"Is it painful in the short term? You bet it is," said Nathan Jones, the company's chief financial officer. "In the long term, it is absolutely the right thing to do."

Deere said profit fell 3.5 percent in the fiscal third quarter ended July 31, to $387 million, or $1.58 per share, from $401 million, or $1.58 per share, a year earlier.

Sales rose 11 percent to $6 billion, helped by higher prices and strong demand overseas.

Analysts on average had expected profit of $1.90 per share on sales of $5.62 billion, according to Reuters Estimates. Deere itself had forecast net income of $450 million to $475 million.

Scott Burns, an analyst at Morningstar, called the results disappointing, especially in the commercial and consumer business, but noted Deere's outlook may be on the safe side.

Deere is "a conservative company and they are not going to go out on a limb," he said. "Some of the sales lost in 2005 will be recouped in 2006, but I don't think the company will say that."

Quarterly operating profit fell 9 percent to $262 million at its agricultural equipment division, while earnings at its commercial and consumer equipment unit plummeted to $60 million from $193 million a year earlier.

Deere said it expects equipment production to fall 23 percent in the fourth quarter, and estimates profits of $175 million to $200 million in the period. That translates to a range of 72 cents to 82 cents per share, analysts said, well below the average Wall Street forecast of $1.21.

Deere forecast full-year earnings of about $1.4 billion, down from an earlier view of $1.55 billion to $1.6 billion.

Deere forecast worldwide sales of farm equipment will be up 6 percent for the full year. It cut its forecast for both North American sales and sales in Western Europe, but raised sales forecasts for Latin America.

Commercial and consumer equipment sales will be down 5 percent, it said. It said construction and forestry equipment sales will be up about 21 percent, from an earlier estimate of 18 percent to 20 percent, citing a healthy U.S. economy, strong housing starts and overseas demand for pulp and paper.

The Bush administration's $286 billion highway spending bill, signed last week, "will be great for Deere's construction business," said Morningstar's Burns.

Prudential Equity Group analyst Andrew Casey wrote in a research note to clients: "While the stock likely will continue to be volatile, we would be buyers on weakness."

Shares of Deere were trading down $6.39 at $66.4 on the New York Stock Exchange (search). Shares of No. 2 farm equipment company CNH Global were down 2.7 percent at $20.11, and Agco was down 5.7 percent at $19.75.

Lawn-care equipment maker Toro was down 2.3 percent at $40.75, while retailer Tractor Supply Co. (TSCO) was down 4.4 percent at $51.68 on the Nasdaq.