Despite poor weather putting a damper on crop yields and existing inventories at 16-year lows, crop prices, and anything associated with them, have taken it on the chin lately amid fears of the global economy heading back into recession and emerging markets like China losing steam. Shares of farming companies have been down sharply over the last few weeks, as shown by the nearly 20% decline in the Market Vectors Agribusiness ETF
Planning for a bright future
Let's start with AGCO
Despite the current market climate, AGCO had been looking for a way to expand its business, particularly in North America, its weakest region. Unfortunately, the tractor market is highly consolidated, led mostly by Deere
Hot off the GSI acquisition, AGCO also announced that it would spend $55 million to expand three of its four factories in Brazil. Brazil is one market where AGCO has dominance, controlling up to 60% of the tractor market. However, the company still only earns 25% of its sales in Brazil, and according to the Food and Agriculture Organization's latest 2006 numbers, there were only 12.9 tractors in use per 1,000 hectares of arable land in Brazil, compared to 27.6 in the United States. AGCO's expansion here will help it further tap into a very large market opportunity.
And before you write these investments off as too optimistic in the face of another global recession, bear in mind that AGCO's return on invested capital currently stands at a healthy 11.6% and has been trending upward over the last decade.
AGCO's not alone
Meanwhile, Deere is also making a sizable investment in Brazil, with its plans to spend $124 million to build two factories, one wholly owned and the other jointly with Hitachi Construction Machinery. While these factories will manufacture construction machinery instead of Deere's usual agricultural machinery, the opportunity is still large. Even if Brazil's fast-growing economy slows down, the country will still be spending a huge amount on infrastructure as it prepares to host the 2014 World Cup and the 2016 Summer Olympics. Deere also recently announced plans to spend $100 million to build a tractor and harvester manufacturing plant in Argentina, one of the top producers of corn and soybeans.
Deere certainly needs its international expansions. In the U.S., the tepid economy led to only a 10% growth in Deere's sales for the third quarter, but international sales increased by a massive 49%.
Nor is it just tractors
Other areas of agribusiness are expanding and making investments as well. Pioneer Hi-Bred, the seed division of DuPont
Elsewhere, fertilizer company Mosaic
The Foolish bottom line
The market is always quick to panic and sell shares of companies and industries that suddenly fall out of favor. But these companies have a demonstrated history of strong performance, and they aren't panicking. They're expanding their businesses, ready to profit from future growth.