Lindsay Corporation (NYSE:LNN) reported impressive second-quarter earnings on Wednesday, with record sales and increased margins leading to a 52% increase in earnings. Much of that performance can be credited to last year’s drought in the Midwest, one of the worst on record, that had the combined effect of pumping up crop prices — which many farmers would still benefit from even if their fields were fallow, via crop insurance — and of encouraging farmers to upgrade their irrigation equipment to gird against future dry years.
Well, so far, it’s looking as if we’re already in another dry year. According to the United States Drought Monitor, almost the entire western half of the U.S. is experiencing some kind of drought, with much of the Corn Belt and Great Plains regions experiencing “extreme” or “exceptional” drought conditions.
Meanwhile, farmers are expected to plant more corn than in any year since 1936, and even Lindsay Corporation (NYSE:LNN) itself cautioned that if corn supplies rebound from last year’s 16-year low, prices will go down, and farmers will have less income to upgrade their equipment with.
Let’s be real
Honestly, farmers have been expected to plant a record amount of corn every year for the past several years, which forecasters expect will lead to a record crop that will magically rebuild global corn supplies and bring the price down. It was expected last year, before a record drought led to one of the worst harvests in the past decade; and it was expected in 2011, before spring floods delayed planting and summer heat destroyed crops.
This year may play out like 2011. The parts of the Midwest that aren’t experiencing drought right now are instead enduring unseasonal snowstorms that may lead to flooding. Reports indicate that plantings are on track, but flooding may damage the crop, and, ironically, it still isn’t enough water to make up for previous drought conditions.
The global opportunity
According to the USDA’s 2008 Farm and Ranch Irrigation Survey, only about 14% of cropland in the U.S. is irrigated, and less than half of that is done with high-efficiency center pivot systems, like the kind Lindsay Corporation (NYSE:LNN) sells. The second most used method is gravity flow irrigation, a form of extremely low-efficiency flood irrigation.
Because such a low percentage of the U.S. is irrigated, it still represents a good opportunity for Lindsay, but the U.S. is comparatively high-tech. Developing regions in Asia, Africa, and the Middle East irrigate a higher percent of their cropland, but cheaper flood irrigation is the dominant method. Lindsay Corporation (NYSE:LNN) gets a healthy 36% of its sales outside the U.S., and while that’s slightly less than competitor Valmont Industries, Inc. (NYSE:VMI) , at 40%, Lindsay gets a much higher percentage of its sales from irrigation equipment, while Valmont focuses more on utilities equipment such as street lights. That helps to explain why Lindsay Corporation (NYSE:LNN) was able to grow sales by 20% over the past four quarters and outpace Valmont’s 14% growth.
