Although the rapid price inflation of corn, wheat and soy due to recent domestic drought conditions and record-high profits for farmers are translating into very good demand for irrigation equipment through the second half of 2012, C. Schon Williams, Vice President at BB&T Capital Markets, warns the continuous rise is not sustainable forever.
“There is a tipping point, where if we start to see too much of the crop actually destroyed, that could leave farmers at a point where they actually have no crops to produce whatsoever, and at that point, they become totally reliant on government insurance to backstop them. And in that environment, economically, they are probably OK. They will be made partially whole by the insurance, but it could actually have a negative effect on demand,” Williams said.
Williams has a “buy” rating on Valmont Industries (VMI), an irrigation equipment company with an electrical transmission component to the business. VMI is a bellwether in the irrigation equipment space and has already seen some upside due to its exposure to the agricultural spikes, and the company’s transmission business is also seeing positive catalysts.
“Valmont has seen very good order activity on the transmission side and the pricing dynamic has improved significantly as well because there is still fairly limited capacity within the industry, Williams said. “At the same time that you’ve seen the order books increase, the pricing environment has improved dramatically as well. So in my mind, a name like Valmont has additional catalysts going forward that would benefit earnings down the road.”
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