Irrigation Equipment Market

2015 Irrigation Equipment Market

MicroMarketMonitor 10/14/2015

“Opportunity: Global water irrigation’s long-term growth” Water conservation and usage is just beginning to become a talked about issue around the world and especially within the U.S. However, water costs for American farmers are practically nothing. This does not motivate farmers to limit the usage of wasteful processes (such as Gravity Flow) on their land. It is unfortunate, but sometimes it takes instances like a major drought to wake up local governments in order to put policies in place to encourage the agriculture industry to start conserving its water usage. Simply by analyzing the trajectory of population growth and water demand versus current water supply, this government intervention will inevitably occur; it’s simply a matter of when.

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As evidenced by global players such as Lindsay and Valmont (NYSE: VMI), demand for advanced irrigation equipment is currently growing at a rapid pace.

Despite a solid growth trajectory already, I believe a new wave of growth is on the horizon with the help of 3 growth pillars that will gradually come into play around the world:

Gravity flow irrigation – Essentially pumping water onto crop fields, and letting the water flood the land and sink into the soil. Although this method needs limited upfront investment because the infrastructure is quite primitive, the downside is much water is lost through evaporation during the process, excess water typically drowns portions of the crops, and overall yields are lowest using this archaic method.

Central pivot irrigation – This process involves large sprinkler systems that rotate in a circular format above the crops, sprinkling measured amounts of water across the irrigated fields. This is the most popular process for farmers today as although it costs an upfront investment, crop yields are among the highest and the Pivot method can be used on mostly all types of farmland.

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Drip/Micro irrigation – This the most expensive type of equipment used by farmers as this process entails a large amount of piping and small sprinklers which wind through cropland delicately dripping small amounts of water next to the physical root of each specific crop. This process typically has the highest yields out of other methods. However, the upfront investment is extremely expensive (~3x more than Pivot), and the process can only be used on a certain types of crops (e.g., grapes, vine crops).

Companies in this industry are seeing growth due to increased demand resulting from higher commodity prices and farm incomes along with strong demand in international markets. Drought conditions in 2012 led to an increase in commodity prices, showing the importance of efficient mechanical irrigation and driving up demand for irrigation equipment. The demand for this equipment in the near future would be determined by farmer sentiment based on weather conditions, commodity prices, a strong economy that supports agriculture, and government encouragement for water conservation projects. In the long term, demand for irrigation equipment driven by population growth and the global scarcity of fresh water will help modest expansion for companies like  Lindsay Corp (LNN),  Valmont (VMI), and  Toro Co (TTC) that sell irrigation equipment. Scarcity of agricultural resources should also be positive for the Market Vectors Agribusiness ETF (MOO), and the PowerShares DB Agriculture Fund (DBA) in the long term.

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