Will Deere Financial Services 30+ day delinquency rates increase by more than 25% from Q4 FY2025 levels by Q3 FY2026?

The central 'stabilizer vs amplifier' debate that this market tests has been substantially resolved by Q1 FY2026 data. Explicit lower provisions and favorable spreads are the most direct possible evidence that FS is behaving as a stabilizer in the current environment, not an amplifier. The previous assessment flagged that FS credit quality was an open question pending Q1 data — that data has now arrived and it points clearly in the negative direction for this market. The remaining resolution window is two quarters (Q2 and Q3 FY2026). For the market to resolve YES, FS would need to reverse course materially from an explicitly improving trajectory. South America industry softening (-5%) is a genuine negative for the FS portfolio's international exposure, but it is modest and partially offset by the $12B Farmer Bridge Assistance Program. Maintaining MEDIUM rather than HIGH confidence because two quarters remain and ag cycle reversals can happen quickly.

Probability tree analysis: P(YES) = P(conditions deteriorate from current improving trajectory) × P(deterioration sufficient to cause 25%+ spike) × P(spike occurs within remaining 2 quarters). Q1 FY2026 data establishes improving credit trajectory. P(deterioration from here) is materially lower than at prior assessment — conditions would need to reverse, not just continue declining. The $12B Farmer Bridge Assistance Program directly addresses the primary mechanism for delinquency spikes: farmer payment capacity. Accelerating used equipment clearance supports collateral values — the second mechanism is also being addressed. Upgraded NI guidance ($4.5-5.0B from $4.0-4.75B) and resumed buybacks ($750M) signal management confidence in underlying cash generation. The compound path to YES has become substantially less likely than the 22% prior estimate.

The 25% threshold for delinquency increase now requires a directional reversal from explicitly improving FS credit metrics, not merely a continuation of existing stress. This is a higher bar than at the prior assessment, where the trajectory was ambiguous. However, I assign a slightly higher probability than peers because: (1) South America softening (-5% industry) is a real headwind for the portion of the FS portfolio with international exposure; (2) 'bottom of cycle' calls in agricultural equipment have been premature before; (3) the $12B Farmer Bridge Assistance, while positive, is a government program with implementation uncertainty. The prior Perfect Storm probability was reduced from 8-15% to 3-8%, and since the delinquency spike is a precondition for that scenario, the YES probability for this market should be consistent with those bounds — the tail end of the new range (~0.08) plus a small probability mass for a non-catastrophic delinquency spike that doesn't reach full Perfect Storm. ~0.15 captures this range.

Quantitative anchors from Q1 FY2026: provisions declining (direction not disclosed numerically but management explicitly cited), spreads favorable, NI guidance raised $500M at midpoint. These three data points form a coherent picture of improving FS credit quality. Used equipment clearing at accelerated pace reduces the collateral value deterioration risk that was the leading indicator for potential delinquency stress. With two quarters remaining (Q2 and Q3 FY2026), the question is whether the current trajectory reverses. South America softening of 5% is the only new negative signal and represents a minority of the FS portfolio. Net quantitative assessment: probability has declined meaningfully from 0.22 baseline. The 0.14 estimate reflects residual uncertainty from the absence of disclosed baseline delinquency rate numbers — even with qualitative improvement, the specific threshold distance is not knowable.

Historical pattern analysis: captive finance portfolios in industrial equipment that show improving credit metrics in Q1 of a downcycle rarely spike to 25%+ delinquency increases in the following two quarters without a discrete external shock (e.g., tariff escalation, commodity price collapse, severe weather event). The Q1 FY2026 data is a strong directional indicator. The $12B Farmer Bridge Assistance is a significant policy intervention — at scale, it is meaningfully larger than the typical support programs available in prior agricultural downturns. The probability I assign (0.11) reflects primarily: residual tail risk from South America (-5% industry), implementation uncertainty in the Bridge program, and the theoretical possibility of an undisclosed stress in the FS portfolio not captured by management commentary.

The dominant signal from Q1 FY2026 is directionally decisive: FS credit quality is improving, not deteriorating. The prior assessment's central uncertainty was whether conditions would shift from moderate stress (stabilizer) to severe compound stress (amplifier). Q1 data indicates moderate stress is the correct characterization — provisions are declining, not rising. The $12B Farmer Bridge Assistance Program directly addresses farmer liquidity (the demand-side delinquency driver) and works in conjunction with the existing USDA $40B+ support. Even accounting for the South America -5% industry softening, the net expected portfolio credit quality in Q2 and Q3 FY2026 is improving. The YES case now requires a reversal of multiple concurrent positive trends within two quarters — low but not negligible probability given the complexity of international ag finance.

Key factor: explicit lower provisions from Q1 FY2026 earnings is the most direct evidence available. Management voluntarily highlighted lower provisions and favorable spreads — this is management communicating that FS credit quality is better than feared. For the market to resolve YES, this improvement would need to reverse materially within two quarters. The $12B Farmer Bridge Assistance provides additional runway for borrowers under stress. Buyback resumption ($750M) signals that management views liquidity risk as substantially reduced.

Key factor: Perfect Storm tail risk was explicitly reduced from 8-15% to 3-8% in the post-earnings reassessment. The delinquency spike in this market is stated as a precondition for the Perfect Storm scenario. If the tail risk scenario has a 3-8% probability range, the precondition (this market's YES) should be at or above that range but bounded by it as a floor. The YES probability here should be somewhat higher than the full Perfect Storm probability (since the spike could occur without full Perfect Storm materializing), but the reduction in tail risk directly constrains the upper bound. At 0.10, I am near the new tail risk floor, reflecting that the Q1 data has substantially closed the path to YES.

Key factor: the two mechanisms for delinquency spikes — farmer payment capacity and collateral values — are both being addressed simultaneously. $12B Farmer Bridge Assistance addresses payment capacity directly. Accelerating used equipment clearance (supported by pool fund / incentive programs) stabilizes collateral values by absorbing excess supply from the market. In Q1 FY2026 data, both mechanisms appear to be working. The residual risk is South America (-5% industry softening) and the possibility that Q2 or Q3 introduces a new stress vector. At 0.13, this reflects that two simultaneous positive interventions occurring while the existing trajectory is improving is a strong but not definitive case for NO.