Lindsay Corporation (NYSE:LNN), one of the two biggest irrigation companies in the United States, once again reported disappointing quarterly earnings recently. Investors may remember that irrigation sales for both Lindsay and its major competitor Valmont Industries (NYSE:VMI) decreased sharply last quarter, leading to a slump in overall profits, primarily as a result of better conditions for farmers. Read on to see why good news for farmers (and most of the rest of us) is bad news for irrigators, and what may be in store for Lindsay.
A rough year ahead
The irony of being a farm equipment manufacturer is that you tend to do well when farms don't. If crop yields are low, crop prices will tend to be higher. This tends to prompt farmers to invest in better equipment, better seeds, and better fertilizer in order to benefit more from those higher selling prices. Irrigation companies are especially sensitive to this cyclicality because not only do crop prices tend to go down during rainy years, but so does the need for their products.
Lindsay is thus coming up against some difficult comparisons, as 2012 had one of the worst droughts in years, boosting some crop prices to record highs throughout the following year, along with Lindsay's sales. Irrigation sales fell 18% last quarter and another 16% during this quarter. Valmont fared better with only a 6% decline in its irrigation segment, and the company was somewhat insulated from the decline already, as its irrigation segment only accounted for about a quarter of overall sales, compared to Lindsay which got almost 90% of its sales from its irrigation segment.
Lindsay isn't alone in its troubles though. Other equipment manufacturers are facing similar problems. In January, Farm Journal surveyed more than 1,500 farmers and ranchers and asked how many pieces of farm machinery they planned to purchase this year. A whopping 39% said none, while another 25% said they only planned to buy one piece of equipment. Deere (NYSE:DE)recently posted a strong quarter, but predicted that the rest of the year would be very difficult, mainly because of lower farm incomes from decreased crop prices.
Lindsay also mentioned the situation with Russia and Ukraine in its conference call, stating that while the situation didn't affect demand in this recent quarter, management expects it to be a headwind for the foreseeable future. While that's not a huge worry for Lindsay investors -- the company only gets 38% of its sales internationally, and that particular region likely only makes up a fraction of total international sales -- it's still a concern for agriculture investors in general. Russia and Ukraine are two of the top producers of wheat and AGCO and CNH both have partnerships with Russian companies that are important to their growth strategies.
Patience is a virtue
Unfortunately, sensitivity to everything from which way the political winds are blowing to which way the literal winds are blowing is the name of the game for agriculture investing. There will be years like 2012, when the Corn Belt may as well be the Dust Bowl and stock prices for equipment manufacturers will be at record highs. And there will be years like 2014, when crop prices fall closer to their long-term average and growth for equipment manufacturers becomes difficult.
However, over the long term, the growth drivers for these companies should be more reliable. The simple fact that a growing global population will need more food means farmers will need to invest in better equipment to raise crop yields. These companies are likely to benefit in the long term, and investors who can wait through difficult periods could be rewarded. It's that, or become a very skilled meteorologist/political pundit.
Jacob Roche has no position in any stocks mentioned. The Motley Fool owns shares of Lindsay and Valmont Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.