Sunday, December 22

Week 129 - Crop irrigation equipment

Situation: The “Green Revolution” of the 1970s grew out of innovations in farm equipment, augmented by improvements in tillage techniques, fertilizers, insecticides, herbicides, and seeds (see Week 124). Possibly the most important innovation came soon afterward, when groundwater irrigation (from wells) began to replace surface water irrigation (from canals). That transition grew from the innovation of “center-pivot” sprinklers in the 1950s and 60s. Those sprinklers can water 136 acres (of the 160 acres in a quarter section of land) in a single rotation around the center pivot. That cuts the water requirement for growing corn by over 40%. Now another innovation is gaining acceptance, and that is buried drip irrigation systems which selectively irrigate the root zone and cut water requirements by another 40%.

At present, there are a billion acres of irrigated land worldwide. Nine million of those acres are in Nebraska, which is arguably the most productive region for agriculture on the planet. Nearly 8.5 million of those 9 million acres are irrigated by groundwater pumped to center pivots. This doubles productivity in a state that gets only 22 inches of rain a year. Dryland farming depends on rainfall and rainfall of less than 20 inches produces only 110 to 140 bushels of corn per acre, whereas, the yield with center-pivot irrigation is roughly doubled. 

Historically, dams have been the most important piece of irrigation equipment. The technology of storing water during the rainy season, for use during the dry season when crops are maturing, has until recently been the only way farmers could “ride out” a multi-year drought. Dams also protect fields and towns from flooding, recharge the aquifer, and provide recreation opportunities that bring in tourist dollars. The unfortunate aspect of the Green Revolution is that farmland has increased 10-fold in value, making it too expensive to buy up and flood with a new dam. (Eminent Domain cannot be used to seize land for the apparent purpose of enriching farmers.) Here in the US, the Army Corps of Engineers worked in the 1970s and 80s to map out all the best locations for placing dams but few have been built. That forces greater use of groundwater wells but also removes the best way to recharge the aquifers that support those wells, which is the reservoir behind a dam--combined with drainage canals that divert excess water (produced by floods) into holding basins. For further information on crop irrigation strategies visit the University of Nebraska at Lincoln website (

As an investor, we think you’ll want to know which listed companies provide irrigation equipment. There are two companies that make center-pivot sprinkler systems, Valmont Industries (VMI), which holds the original patent, and Lindsay Corporation (LNN). You’ll also want to know which listed companies make and install subsurface drip irrigation (SDI) systems. Again, there are two: John Deere (DE) and Toro (TTC). For groundwater irrigation systems, you’ll want to know which companies make the pumps and plumbing that bring well water to the surface and distribute it. Here there are 3 leaders: Xylem (XYL), a company that only recently started issuing stock, Flowserve (FLS), and Marmon Water, a subsidiary of Berkshire Hathaway (BRK-A). Diesel and propane powered generators supply power to groundwater pumps; Cummins (CMI) and Caterpillar (CAT) are the most prominent suppliers. 

The future of irrigation will be driven by data collected on crop moisture levels when tractors make a pass through a field. Trimble Navigation (TRMB) has software that uses satellite weather information to produce virtual data on rainfall at any GPS location specified by the farmer. Modern tractors have global positioning systems (GPS) that link to an onboard computer containing data from previous passes through the field. Software packages take over the chores of seeding the field, deciding how much and what kind of fertilizer to place where, and doing the same for insecticides, herbicides, and fungicides. In a new program called Field360, the data collected on John Deere (DE) tractors will be wirelessly downloaded to a local DuPont Pioneer (DD) field office for analysis. Information on crop moisture levels in different parts of the field will be made available to the farmer to use in programming sprinkler (or drip) irrigation systems. A similar system is being rolled out by Monsanto (MON) and another is available through Raven Industries (RAVN) that links to AGCO tractors. 

For this week’s Table, we have populated our basic spreadsheet with data for the companies cited above; total returns are impressive. There is, however, a problem for investors: the spreadsheet looks like it has the measles because red highlights are everywhere. Those indicate substandard performance vs. our benchmark (the bond-hedged S&P 500 Index - VBINX). This means that while the potential rewards from investing in irrigation equipment are high the risk is even higher. 

Bottom Line: Modern farming is increasingly about automation, and programmed with the help of GPS. This system is gradually reducing the overuse or underuse of inputs like fertilizer, insecticides, herbicides, fungicides, and now water. That automation is based in tractors and combines, standard pieces of farm equipment for generations, that now cost several hundred thousand dollars apiece. For example, at a cost of less than a thousand dollars a year that information can be transferred wirelessly in real time from Deere (DE) tractors to a DuPont Pioneer (DD) field office for analysis. In many parts of the world, water scarcity is the key factor limiting production farming. The new era of micromanagement via GPS promises to optimize water use by responding to known crop moisture levels and rainfall in different parts of a field. Further progress in optimizing water use will depend on large-scale financing for projects that collect and store rain and flood waters by using dams, diversion canals and holding basins. In agricultural areas afflicted with creeping desertification, such projects are the only known way to recharge the depleted aquifers that support groundwater irrigation.

The only stocks mentioned here that currently have good long- and short-term Finance Value, along with high S&P bond ratings, are Berkshire Hathaway (BRK-A) and Monsanto (MON).

Risk Rating: 7

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Full disclosure: I have stock in Deere, Flowserve, DuPont, Cummins, Caterpillar, and Berkshire Hathaway.

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