AGCO's Small Move Is Part of a Big Plan

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AGCO recently announced that it will create a joint venture with Russian machinery company Russian Machines to build a manufacturing and distribution facility, complete with a showroom, training center, and, down the road, a model farm. Each company will have equal ownership over the joint venture, which will cost a total of $100 million over the next three years.

While the joint venture doesn't represent a very large investment for AGCO -- the company's contribution comes to only about $17 million annually, or 5% of AGCO's 2012 capital expenditures -- AGCO's CEO nevertheless called the plan "a very significant step in AGCO's growth strategy for the Russian market." But how does Russia factor into AGCO's overall growth strategy?

Believe me when I say to you ...
While North America is currently the strongest region for farm machinery sales, over the long term, it's going to be emerging markets that provide the most growth for companies such as AGCO, Deere , and CNH . The World Bank uses tractors in use per 100 square kilometers of arable land as a measurement of agricultural machinery use, and while the data is somewhat spotty, in 1998, the North America region had almost 20% more tractors in use than the global average. More generally, countries in the Organization for Economic Cooperation and Development -- a group of mostly rich nations -- used more than twice the global average. By comparison, low-income countries had less than a tenth of the global average.

So where does Russia fall? In many ways, Russia is a big, powerful country, and its economy is globally important -- it's the "R" in BRIC, for goodness' sake. Russia is also the world's top barley producer and one of the top wheat producers. Yet in 2005, the most recent year that can be compared with the OECD's figures, Russia had just 39 tractors per 100 square kilometers of arable land, while the OECD average stood at 440.

A big reason for Russia's low level of agricultural mechanization is that the Russian Federation, as it is formally known, has existed only since the fall of the Soviet empire in the early 1990s. Farms were previously state-owned, and the transition to a market economy was very difficult for farmers, who had less and less to invest in their farms. Despite the advent of better seeds, better fertilizer, and better machinery, Russian cereal yields have barely changed in 20 years, while global yields are up almost 30%.

I hope the Russians love their crop yields, too
Clearly, Russia has some catching up to do. But Russia is just part of AGCO's emerging-market strategy. In fact, while AGCO's sales in the United States have nearly doubled in the past three years, sales in South America and Africa have done almost as well, and in Asia sales have more than tripled. It's a similar story for CNH, whose Latin American sales have outpaced North America, which is almost matched by Asia. The odd man out is Deere, which unfortunately breaks sales into only two regions -- the U.S. and Canada, and Outside the U.S. and Canada -- but even there, sales outside the U.S. and Canada have grown faster.

Deere and AGCO are both making investments in the developing world. Aside from its new Russian plans, AGCO announced plans last year to spend $100 million over three years to build up its manufacturing presence in Africa, and dealers for Deere in Africa are opening new locations to sell equipment. Deere's management also recently noted that it was growing South American market share considerably.

CNH, however, recently accepted a merger offer from Fiat, its majority shareholder. The two companies believe the merger will bring useful synergies, but the disruptive restructuring period may delay any major investments.

The Foolish bottom line
While AGCO's Russian facility may seem like a drop in the bucket in terms of capital expenditures for the company, it's part of a much larger strategy the top three agricultural machinery manufacturers are pursuing. Keeping an eye on the investments and expansions these companies make can provide a key insight into how the competitive landscape is changing. Add these companies to My Watchlist to stay on top.

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