When the AGCO farm machinery company bought a grain storage business two years ago, the purchase was considered unusual for a manufacturer of combines and tractors.
In 2013, the company expects the revenues of its GSI subsidiary to grow by 5 to 7 percent, thanks in part to increased demand for on-farm grain storage.
“Overall, the view is pretty positive,” said Adam Fleck, farm machinery analyst at the Morningstar research firm. “The timing looks pretty good.”
GSI, which makes storage facilities and automated livestock feeding equipment, is expected to contribute up to $750 million to AGCO’s revenues this year, he said.
While that will amount to a fraction of AGCO’s total sales — which the company projects to be $11 billion in 2013 — GSI helps the company hedge against fluctuations in the grain industry, Fleck said.
Higher grain production in North America has deflated prices, which is typically negative for machinery, but a larger crop sparks demand for storage, he said.
Also, reduced grain prices are expected to improve profitability in the livestock sector — which relies on such crops for feed — freeing up money for swine and poultry growers to spend on GSI’s automated equipment, Fleck said.
“It tends to be more countercyclical compared to the combine and tractor business,” he said.
GSI earns about 65 percent of its revenues from grain storage and 35 percent form its livestock systems, according to AGCO, which paid $930 million for the company in November 2011.
The subsidiary will contribute primarily to AGCO’s sales in North America, where its revenues are projected to grow by 5 percent in 2013, according to a company presentation.
Sales in Europe, where much of AGCO’s machinery is sold, are expected to drop by up to 5 percent, the company said. AGCO’s South American sales, while smaller, are forecast to rise up to 20 percent.
AGCO’s footprint in South America may also be a boon for its GSI subsidiary, as the Brazilian government has vowed to provide about $12 billion in subsidies for on-farm storage, said Fleck.
Currently, trucks loaded with grain get stuck in traffic while waiting to unload at Brazilian ports, so the country sees a need for on-farm silos, he said.
The investment will pay off for AGCO in the longer term, Fleck said. “It’s probably going to take a few years.”
The overall growth in farm machinery sales is expected to flatten out after several stellar years, largely due to lower cash receipts for farmers, he said.
Even so, the sector will probably remain healthy, Fleck said. “I don’t think anyone is expecting a cliff-type fall off.”