It is remarkable to think that our agrarian society that paralleled the ebbs and flows of the sun meandering across the sky has transitioned to a culture executing daily tasks from the comfort of the couch using the power of technology and building entire ecosystems without ever having picked up a speck of soil or directly deal with the ultimate unknown- mother nature. Video Games such as Farmville, launched in 2009, and 2004 PC Video game called John Deere: American Farmer, available to the general public, allows for an immersive and exciting experience while diluting and sometimes obfuscating the physical labor involved.
It is easy to overlook the agricultural sector since it is a commodity-driven enterprise where the interactions between supply and demand are dynamic. Instead of focusing on the commodity, a broader spotlight highlights a different area of focus, operations. Within this operational aspect is the inclusion of technology to address issues that can create exciting outcomes and increase productivity dramatically. AGCO Corp (NYSE: AGCO), agricultural equipment and parts company headquartered in Duluth, Georgia, is a company I am adding to my watchlist for its specific participation in the farming complex.
On March 24, 2021, AGCO Corp published their 2020 Sustainability Report, from which a particular quote stood out “The future farmer will resemble a computer scientist, leveraging technology to increase productivity in order to meet the rising demand for food” . On page 9, two priorities, 1)”Develop New Sensors, Technologies, & Machine Features” and 2) “Fast Track Connectivity Across AGCO’s Core Brands,” attracted my attention since such technologies will only enable a more efficient farmer. An efficient farmer is critically vital to the agricultural industrial complex since the lack thereof could negatively affect the food supply of the populous.
Under the AGCO Corp (NYSE: AGCO) portfolio are Challenger, FENDT, Massey Ferguson, Valtra, AP Platform, Cimbria, Cumberland, Fella, FUSE, Gleaner, GSI, Precision Planting, Sunflow, Tecno, and White Planters. A review of their 2020 10-K Annual Report, 2015 10-K Annual Report, and 2010 10-K Annual Report, indicates that the company generated $9.15 billion in Net Sales for 2020, representing an increase of 32.67% from $6.90 billion in Net Sales in 2010. In addition, the company hosts a 5-year Net Sales Average increase of 4.36% and a 10-year Net Sales Average Increase of 3.78%. Adjusted Net Income and Adjusted Earnings Per Share for the Fiscal Year 2020 was $427.1 million and $5.63, representing an average increase of 243.88% from the Fiscal Year 2019. The 5-year average Net Income increase was recorded at 42.94%, whereas the 10-year average Net Income increase was 31.67%. The Total Number of Employees in 2006 was 12,804 compared to 21,426 in 2020.
|Year||Net Sales||YOY||Net Income||YOY|
|5 yr Average (2016-2020)||$8,652.02||4.36%||$236.86||42.94%|
|10 yr Average (2011-2020||$8,997.34||3.78%||$356.37||31.67%|
Between 2010 and 2020, half of its Net Sales generated were from Europe, and a quarter was from North America, even though the Independent Dealers and Distributor’s composition mix has transitioned. In 2010, there was 1,100, and 950 Independent Dealers and Distributor’s in Europe and North America. Fast-forward to 2020; the company registered 785 and 1,820 Independent Dealers and Distributors in Europe and North America, respectively. This migration and attraction towards North America could be understood to apply the decades of successful European strategies into a diverse North American market. Furthermore, between 2010 and 2020, over 50% of the company’s net sales were derived from Tractors, with the second most significant contributor Replacement Parts. The company offers three variety of tractors- High Horsepower (140hp-650hp), Utility (40hp-130hp) and Compact (<40hp). The portrait of a farmer involves an individual seated on a tractor and managing their beautiful fields. A tractor will transition to a tool of grave dependence since the farmer sitting on the machine might not be there for long.
The U.S. Department of Agriculture, in their 2007 Census of Agriculture Farmers by Age Highlights publication, mentioned that “The average age of the principal farm operator has increased roughly one year in each census cycle, from 50.3 in 1978 to 57.1 in 2007” . The most eye-catching should be the statement- “The fastest growing group of farm operators is those 65 years and over” . That was back in 2007. The most recent Census of Agriculture was published in 2017, and guess what? “The average age of all U.S. farm producers in 2017 was 57.5 years, up 1.2 years from 2012, continuing a long-term trend of aging in the U.S. producer population” . As of the 2017 Census of Agriculture Farm Producers Highlights, most U.S. Producers are Male; 34% of U.S. Producers were Aged 65+, 74% & 39% lived and did not work off their farms, 73% had 11 or more years of farming experience. It is not that I think that the human capital provided by the average U.S. farmer will disappear. It is more that the Decline in the Number of Farms compared to Average Farm Size allows considering tractors and other technological advancements as a possible reason to overlook the need for human capital.
The following chart is from the United States Department of Agriculture Economic Research Service. Relative to Land in Farms (million), which has stayed relatively flat since 1850, the movement of the Number of Farms (in millions) against the Average Farm Size (100 acres per farm) intersect and exchange trajectory in the 1950s.
Juxtapose the chart to this summary from the USDA June 2005 publication titled, The 20th Century Transformation of U.S. Agriculture and Farm Policy– between 1900 and 1960, the number of tractors rose from 920,000 to 4.7 million as the number of work animals dropped 21.6 million to 3 million. A possible extrapolation could be the 1917 introduction of the cheaper Fordson Tractor by American Industrialist Henry Ford. The Fordson allowed farmers to apply the power of mechanization and apply more “horsepower.” According to the Smithsonian Institution, “Seventy-five percent of tractors purchased in 1923 were Fordsons” . In 1939, the Ford Motor Company introduced the Ford-Ferguson Model 9N Tractor, “a Ford tractor with a 3-point hydraulic hitch-and-lift system invented by Harry Ferguson” . Tractors contributed positively to creating efficiencies for the farmer to deliver better production and yield since they converted the material power of horses to mechanical horsepower. Consider Table 45. Selected Machinery and Equipment on Operation: 2017 and 2012 from the 2017 Census of Agriculture, where off the 4.04 million Tractors on the 1.62 million Farms, 3.57 million Tractors were manufactured before 2013.
Now back to AGCO Corp (NYSE: AGCO). I would highly recommend reading their 2020 Sustainability Report, wherein highlighted is the FendtOne. On August 25, 2020, AGCO introduced the FendtONE™ interface in the Fendt® 700 Gen6 Series. According to the release, “There’s no need for operators to divert their attention while driving or performing a critical task to stretch for a knob on the corner post or twist around to access a hydraulic lever on a side console” . I found the following video from Mr. Mike Mitchell of www.faithhopefarms.com on YouTube and to quote Mr. Mitchell, “are we in a spaceship here?.”
It is lazy to fictionalize a tractor with the outlines of the early Fordson tractor in the 21st century where an individual wearing overalls is in control. Instead, allow the liberty to build a portrait where a farm on earth is an enclosed ecosystem protected from the wrath of natural events, filled with autonomous infrastructure monitoring and delivering the best yield from available farmable soil. Farmers will play a dual role of active observers and data analysts, marrying data and intuition to create efficiencies and better results.
Deere & Co (NYSE: DE) offers their version of Precision Agriculture Technology with displays, receivers, and interfaces. Deere & Co (NYSE: DE) has a Market Capitalization of $109.2 billion, roughly 11 times compared to AGCO Corp (NYSE: AGCO) Market Capitalization of $9.9 billion. It is worth noting that AGCO Corp (NYSE: AGCO) is a Standard and Poor’s 400 Midcap Index component.
Why am I adding AGCO instead of DE to my watchlist even though, since March 2020, DE has returned approximately 113% compared to the 106% from AGCO as the broader Standard and Poor’s 500 has only produced about 38%.
Again, the reason is more overall industry trends. In May 2021, the Association of Equipment Manufacturers published the United States Ag Tractor and Combine Report, where Total Farm Tractors sold year to date in 2021 is 25.85% compared to Farm Tractors sold year to date in 2020. Again, look at the chart they provide since it highlights that the 2021 trendline is significantly above the 5 Yr Average between 2016-2020. I think much like the iPhone supercycle that the zeitgeist enjoys, there is a farm machinery supercycle coming where the farming complex will expect more innovative machines.