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By Andrew Leckey
Tractors are pulling in profits for stock investors.
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
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, said Volkmann. Since it takes five pounds of feed to produce one pound of chicken, and 10 pounds of feed to produce one 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," predicted Lawrence De Maria, director of global industrial infrastructure for
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, said De Maria. Growing middle classes around the world will also 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
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
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
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.
All three companies have posted stock price gains this year and last, with Deere and
"Each of the three companies has its strengths with, for example,
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, said Volkmann.
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 believes.
Here are two other stocks in agricultural equipment manufacturing worth noting by investors:
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.
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.
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Investing - Farming Profits: Why Stocks in Ag Equipment Are Strong | Successful Investing
© Andrew Leckey