Things Are Looking Up on the Farm

04/22/2009 11:08 am EST

Focus: STOCKS

Vaughan Scully of Standard & Poor’s reports that US farmers are in good shape financially and that should help manufacturers of agricultural equipment.

US farmers remain in their best financial shape in years following a historic 2008. While a decline in major crop prices means that last year’s performance probably won’t be surpassed in 2009, this year’s crop receipts are expected to be the second highest on record, farm income should rise above its ten-year average, and farm debt is likely to ring in at its lowest-ever recorded level, according to US Department of Agriculture (USDA) forecasts.

The health of the farm economy should benefit companies selling agricultural equipment and services, Standard & Poor’s believes, as farmers take advantage of historically attractive crop prices and strong demand for corn from ethanol producers.

“It’s a bright spot in the economy,” said S&P equity analyst Adrian Compton, who covers farm equipment makers. “We attribute the high level of expected farm income to strong crop receipts, reflecting higher crop prices, increased international demand, and support from government payments.”

Much of the reason for the farm economy’s health is ethanol producers’ demand for corn. These producers bought 25% of the US corn crop in 2008. This surging demand drove corn prices to a record high of $7.61 a bushel in July 2008, pushing wheat and soybean prices higher as well. Since then, the prices of corn, wheat, and soybeans fell by 40% to 50%. However, crop prices are still high enough for farmers to generate a healthy profit.

For 2009, the USDA predicts soybean plantings will reach a record high, corn acreage should hold steady, and wheat acreage should decline. “It is expected that 2009 will be another good year for the farm economy,” the USDA’s Economic Research Service said in its 2009 Farm Sector Income Forecast, “bolstered by strong demand for feed crops, oilseeds, and food grains.”

Agricultural equipment vendors also stand to benefit from strong demand for corn and soybeans. Three companies—Deere (NYSE: DE), CNH Global (NYSE: CNH), and AGCO (NYSE: AG), dominate the farm equipment market, with a combined 55% share. “In our view, long-term energy demand will drive increased corn consumption and, ultimately, cash receipts for farmers, giving them more money to spend on agricultural machinery,” says Compton.

Of the three companies, Compton sees AGCO and Deere benefiting the most because of their greater overall focus on the agriculture equipment industry. CNH, on the other hand,
derives a significant part of its sales from the construction industry, which has a weak outlook.

(AGCO closed below $23 Tuesday, while Deere closed near $38 and CNH closed below $15—Editor.)

Subscribe to The Outlook Online Edition here…

Related Articles on STOCKS