Mechanized farm equipment is one of the best investments a farmer can make. Fertilizer and high-yield seeds may lead to bigger harvests, but tractors and combine harvesters allow a farmer to sow, tend, and harvest larger fields much more easily and with fewer workers.
Unfortunately, much of the developing world lacks these tools. The World Bank uses tractors in use per 100 square kilometers of arable land as a measurement of agricultural machinery use. In 1998, the OECD, a group of mostly rich countries, had 437 on average, whereas the global average stood at 196. Developing areas were even lower, with 126 in the Middle East and North Africa, 121 in Latin America, and 107 in South Asia. As far as the available data show, none of these regions has caught up with the global average, much less that of the OECD.
Even in the developed world, there is increasing pressure for farmers to produce more. This year, farmers in the United States are expected to plant more corn than they've ever planted before, despite the dwindling number of actual farmers. Agricultural productivity in the developed world has come to depend on machinery, and unlike automobiles, which can last for more than a decade, agricultural machinery needs to be replaced every three to seven years. While developing markets present a huge growth opportunity, developed markets can be expected to remain somewhat stable even in hard times.
Why buy all three companies?
In order to get the most out of investing in the tractor industry, you need to understand the nuances to the different companies.
The world's second-largest tractor company, CNH Global
AGCO's merger appeal
Last fall, AGCO also purchased grain storage maker GSI Holdings, citing the opportunities in developing countries, like Brazil, where farmers generally don't have storage capabilities. The acquisition was generally seen as irrelevant to AGCO's core business, but it seems to make sense. Tractors help farmers grow and harvest more crops on more land, but without proper storage, those crops will rot if the farmer can't find an immediate buyer.
At the time of the acquisition, AGCO's CEO mentioned that by diversifying into a tangentially related business, it opened the door to other tangents, like irrigation, milking equipment, and wind energy. The irrigation market is highly consolidated, making Lindsay Corp.
You should be cautious not to rule out such a zany acquisition either. AGCO's important Challenger line of tractors was originally purchased from Caterpillar
The Foolish bottom line
This is one industry where I don't think it's necessary to pick a winner. Each company has its niche and there's enough market to go around. By buying all three, you should benefit from the continuing and growing need for mechanized agriculture throughout the world. That's why today I'm making a broad CAPScall, with outperform calls on Deere, AGCO, and CNH Global.