Investors sold off shares of Lindsay Corp. (NYSE:LNN) on Wednesday on news that the company’s earnings declined at a greater rate than analysts expected. The company reported EPS of $1.28/share on revenue of $170 million versus last year’s $2/share on $220 million in revenue. Furthermore, the company’s backlog shrank year over year to $73.6 million from $80 million. Investors sold off shares to the tune of nearly 5 percent on heavy volume as a result of this news.
The reason for the decline in sales is that farmers have less money with which to buy and upgrade their irrigation systems, which Lindsay produces. This is a result of weakness in the agricultural commodity market. This weakness didn’t just hit Lindsay Corp, but companies such as John Deere (NYSE:DE) and Monsanto (NYSE:MON), which both supply goods to farmers. It also hit fertilizer companies such as Potash Corp. of Saskatchewan (NYSE:POT), which saw fertilizer prices decline as a result of lower agricultural commodity prices.
Given this trend, it seems pretty clear that a bet on Lindsay Corp. is a bet on the prices of agricultural commodities. From a long-term perspective, this is a bet worth making despite near-term weakness. There are good reasons for this. Primarily, the global population is growing, but the amount of arable land is declining. This means that the demand for agricultural commodities will rise as more people will be eating, but there isn’t as much land on which to grow it, which will put pressure on supply. With this upward pressure on demand and downward pressure on supply, agricultural commodity prices have to rise.
There are other very compelling reasons as well. For starters, not only is the demand for food rising, but as people in developing countries become more affluent they will want to eat more meat, and it takes about 4 pounds of grains to generate 1 pound of meat. It follows that this will put upward pressure on not just meat prices but on grain prices as well.
Also, being a farmer is a thankless job that doesn’t pay well because crop prices are so low. The average age of a farmer in the western world is in the mid-late 50s because young people don’t want to go into the industry. In the developing world, farmers are among the poorest people, and nobody aspires to be a farmer. This trend has to reverse or else there won’t be enough farmers in the world to feed its people, and the only way that people are going to be incentivized to enter this thankless industry is that agricultural commodity prices have to rise.