(AG) Trouble for Farm Equipment Makers

Last week, the U.S. Department of Agriculture updated its 2009 outlook for net farm income. The department forecasts a 38% decline in net farm income to $54 billion in 2009 from an estimated $87.2 billion last year. This is lower than the last 10 year average farm income of $63.2 billion.

Companies like AGCO Corp. (AG) and Lindsay Corp. (LNN) depend primarily on farm income for their sales. AGCO, which manufactures and distributes agricultural equipment and related replacement parts acknowledges that the 2009 outlook for the farm equipment machinery is extremely uncertain. The company expects full-year revenues of $6.5 to $6.8 billion, compared to $8.4 billion in 2008.

Lindsay designs and manufactures self-propelled center pivot and lateral move irrigation systems principally for the agricultural industry to increase or stabilize crop production while conserving water, energy and labor. The irrigation equipment segment represented 79% of the company’s total revenues in 2008.

Deteriorating economic conditions and falling agricultural commodity prices had an unfavorable impact on the irrigation segment’s incoming order rate during the first three quarters of fiscal 2009. Lindsay’s domestic irrigation revenues declined 23%, while international irrigation revenues fell 22% during this period. The company said that the current economic conditions are adversely affecting the willingness of farmers to invest in capital goods.

Given the lower expected farm income for the year and lack of credit availability, we believe farmers will stay away from purchasing capital goods in the near term. However, we believe both AGCO and Lindsay will benefit significantly over the long-term due to higher expected food production required to meet the demands of growing population.

We maintain Neutral recommendation on the both the stocks.

Zacks Investment Research
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