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Slowing Farm Equipment Market Won't Uproot Economic Moats

Although ag machinery manufacturers may reap weaker 2014 results, we think Deere's narrow moat is intact.

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The 2013 U.S. grain-growing season has to date proved to be a polar opposite of the drought-riddled harvest of 2012. Although several weeks remain before farmers are able to see the final fruits of their labor, estimate from the U.S. Department of Agriculture currently put this year's corn production volume among the highest in history. Similarly, soybean yields and tonnage should improve from last year. Concerns about an early frost, prevented plantings because of earlier wet weather conditions, and the recent Midwestern heat wave could weigh on ultimate production levels. Nonetheless, we expect much better U.S. volume and rebounding South American tonnage to continue to damp global prices in the medium term.

While we remain concerned about the resulting farm equipment sales environment, we don't believe the potential headwinds will damp  Deere's (DE) narrow economic moat rating or  AGCO's (AGCO) positive moat trend. We believe the long-term potential for farm equipment manufacturers remains positive, given climbing farming marginal costs (boosting minimum crop prices compared with historical levels) and emerging-market mechanization advancements. As such, we recommend investors keep a close eye on both companies for potential margins of safety, especially in light of their offsetting construction (for Deere) and countercyclical grain storage and protein production (for AGCO) businesses.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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