The dramatic growth of emerging markets such as China, India and Brazil; strong crop prices; and the potential for a U.S. economic recovery continue to boost the prices of agricultural equipment manufacturers.
Such a positive outlook makes sense in a world that needs to be fed and for a manufacturing business with limited competitors. Not only are farmers around the world seemingly ready to buy equipment, but in many countries the transition to more modern equipment is long overdue.
"The biggest factor is that farmers are in very good financial shape, and when that happens they step up and reinvest in their businesses," explained Stephen Volkmann, managing director in industrials research for Jefferies and Co. Inc. in New York. "Crop prices are high and demand remains strong, with, for example, China going from being a net exporter of corn to a net importer of corn."
As nations see their gross domestic product grow and consumers have more money to spend, there typically is a transition from basic foods such as rice to wheat, followed by a transition to meats such as chicken, Volkmann said. Because it takes 5 pounds of feed to produce 1 pound of chicken, and 10 pounds of feed to produce 1 pound of pork, a multiplier effect is at work.
"The way the global crop situation is lining up -- be it corn, sugar, cotton, soybeans or anything else -- we envision a bull market in crops through at least next year," said Lawrence De Maria, director of global industrial infrastructure for Sterne Agee in New York. "This raises the cash receipts and outlook for farmers, supporting the demand for farm equipment to increase productivity."
There has been a shift in the agricultural market from having an ample supply of grains on hand to a "just-in-time" inventory that makes demand more immediate, De Maria said. Growing middle classes around the world also will be consuming increasing amounts of protein, he said.
"Things were booming for farming equipment makers until mid-2008 when everything collapsed, but since early 2009 they've been making their way back and are in the early stages of recovery," said Michael Jaffe, senior director of industrial research for Standard and Poor's Corp. in New York. "The growth in India and China has been so solid that it is aiding the entire world economic picture, including the farming equipment makers."
Agricultural equipment is not a complicated stock group to follow, with three major companies much larger than any other players, he noted.
The Big Three stocks in farm equipment are worth consideration by investors, according to the experts
•Deere & Co. (DE), with a strong dealership sales network for its farming, landscaping, construction and forestry equipment, is the largest competitor in agricultural equipment. Founded in 1837 by John Deere, it finances many of its sales through its Deere Credit subsidiary and employs more than 50,000 workers worldwide.
•AGCO Corp. (AGCO), manufacturer of agricultural equipment under the Challenger, Massey Ferguson, Fendt and Valtra brands, is financially sound with modest debt. It employs 15,000 employees worldwide.
•CNH Global NV (CNH), majority-owned by Fiat S.p.A, is the result of the merger of Case Corp. and New Holland more than a decade ago. It makes agricultural and construction equipment sold through a network of 11,000 dealers worldwide. It has more than 28,000 employees. Less profitable than many of its peers, it carries a significant debt load.
All three companies have posted stock price gains this year and last, with Deere and AGCO doing so the most convincingly.
"Each of the three companies has its strengths with, for example, AGCO deriving 54 percent of sales from Europe and 22 percent from North America and CNH getting 30 percent of sales from Europe and 14 percent from Latin America," said Jaffe, who recommends all three stocks. "Deere gets about 37 percent of its sales outside the U.S. and is the least risky of these three because it has the best global coverage."
The average acre of quality farmland in the U.S. yields about 220 bushels of corn, while the global average per acre is only 60 to 80 bushels. If the rest of the world draws closer to our level of productivity, there would be a massive increase in capacity, Volkmann said.
Though overcapacity is a normal part of the agricultural cycle, worldwide growth in demand is likely to be the primary consideration in the industry for several years out, he said.
Here are two other stocks in agricultural equipment manufacturing worth noting by investors:
•Titan International Inc. (TWI), which designs and manufacturers wheels and tires for the farming, construction and earthmoving industries, offers products to meet specifications of original equipment manufacturers such as Deere and Caterpillar. Its potential corresponds to that of the Big Three agricultural equipment companies.
•China Farm Equipment Ltd. (CFE: Singapore), incorporated in 2006, sells products to farmers under the Dragon Boat brand name primarily throughout Asia. It also sells diesel engines under the Binhu and Dragon Boat names. Western manufacturers dominate the agricultural equipment markets of Europe, North America and South America but, as with all things Chinese, the future offers opportunities and it is worth monitoring.