Two Agricultural Companies, Two Different Views on Farm Financing

By Dr. Duru written for One-Twenty

October 9, 2008


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During this earnings season, analysts will be particularly keen to examine the availability of credit. They will want to know whether the reporting company has ready access to credit, and they will want to know whether credit is readily available to customers. On Wednesday, two agricultural companies reported earnings and provided differing views on the status of credit and financing for farmers.

Lindsay Corporation (LNN) is based out of Omaha, Nebraska. LNN "manufactures and sells automated agricultural irrigation systems that enhance or stabilize crop production while conserving water, energy, and labor" (Yahoo!Finance). After reporting earnings, LNN dropped as much as 19% before finishing the day down 7%. According to briefing.com, LNN is wary about the state of financing on the farm:

"...During the past few weeks, there has been a significant reduction in agricultural commodity prices, and a reduction in the availability of financing, which may impact potential customers' ability to buy and finance irrigation equipment. These changes have occurred during a seasonally-low sales period for the U.S. market, so their impact on our markets in the coming months is indeterminable at this time."

Monsanto Co. (MON) is based out of St. Louis, Missouri. MON provides agricultural products for farmers principally in the United States in two segments: Seeds and Genomics, and Agricultural Productivity. After reporting earnings, MON dropped as much as 8% before managing to print out an impressive closing GAIN of 10%. According to briefing.com, MON remains upbeat about the state of financing on the farm:

"...regarding farmers debt situation, the USDA economic research service recently indicated that the debt to asset ratio for farmers is at a very low 10 to 12%. Co says, in addition to those comments, they've also just completed a round of conversations with some of the largest lenders in the agriculture space and there continues to be confidence in the availability of credit for farmers going into the 2009 season. These lenders are telling us that as a normal course of business, they are already renewing and increasing credit lines for customers so that the purchases for this season can begin. Fundamentally, a farmer on solid financial footing should be able to access any credit they need to run their normal operations. Co says, they are watching farmer liquidity closely, but they're comfortable that their strong balance sheet will serve them well through any softness."

LNN and MON sell different products to (presumably) the same customers, yet they see different outlooks for financing on the farm. Monsanto's claims seem more robust given the sources of the data. Perhaps LNN is being cautious to manage analyst expectations given the apparent uncertainty in its business. The stocks of both companies are struggling at or near 52-week lows. I would hazard a guess that if MON can hold Wednesday's lows over the next few weeks of market turbulence, we should take that as a fresh vote of confidence in the agricultural sector and invest accordingly.

Watch the credit markets and be careful out there!

Full disclosure: No related positions. For other disclaimers click here.

DR. DURU®, 2008

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