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Farming via your smartphone – is Deere & Co worth buying? – Investors Chronicle


Jeremy Clarkson isn’t usually renowned for producing television or press content of any real substance, yet there’s no doubting the man’s popularity. Last year, an eight-part series documenting his struggles to get his farm in Oxfordshire up and running struck a chord with countryfolk and city-dwellers alike. But it also brought home just how difficult it is for a small-scale farmer to make a living through primary production.

And yet, the likes of Jim Rogers and other high-profile investors have been talking up the prospects for the wider agricultural sector for the past 20 years or so. The reasons behind this are not difficult to appreciate. The United Nations estimates that by 2050, we will need to feed an additional 1.82bn people on the planet, two-thirds of whom will be in Africa. That’s a 23 per cent increase on the current global population. Throw in worsening soil and water degradation, together with rising global demand for animal protein, and the scope for investors is obvious enough, although slightly troubling from a Malthusian perspective.

So, how will we be able to significantly boost global food production while limiting pressures on the natural environment? A key component in the pursuit of this objective is the ongoing drive to increase farm automation. The roll-out of robotics, drones, and computer vision software is transforming modern agriculture as farmers look to strike a balance between the need for increased yields and ecological stewardship, while the arrival of 5G technology has enabled drones to transmit high-definition images of agricultural land, in addition to monitoring livestock and engaging in pest control.

The demographic challenge isn’t confined to sheer population growth. Increased urbanisation has seen millions of rural workers decamp to cities across the globe in search of higher-paid manufacturing jobs. Nowhere is this more apparent than in China, where rural migrant workers number around 280m at the last count. The trend towards urbanisation has also contributed to an increase in the average age of farmers across the globe. In the UK, the average age of farmers is touching 59 years, so we shouldn’t be too surprised that the size of the global market in agricultural robotics is expected to grow by an average of 19.3 per cent a year through to 2026.

There is no shortage of companies looking to tap into this growth, but investors would be well advised to initially assess the prospects of Deere & Co (US:DE), especially given the US agricultural engineer has just announced that its fully autonomous tractor is ready for large-scale production. Six pairs of stereo cameras enable the tractor to complete a 360-degree scan to detect obstacles when it is cultivating, seeding or harvesting. The 8R tractor calculates distance to a tolerance of less than one inch, while the use of seeds, water and pesticides is optimised through advanced software and global positioning (John Deere Operations Centre Mobile provides real-time access to video, data and metrics.) In short, farmers need only transport the tractor to a field, configure it for autonomous operation and then head down the pub with their smartphones.

Large-scale farmers will probably be first in line for a technology that affords minimal human intervention. Deere & Co has revealed that it will offer its automation system as a kit that can be installed on its other tractor models, widening its potential catchment. There is also the prospect of repeat revenues, as the system will necessitate multi-year digital upgrades in much the same manner as the software-as-a-service model.

While the unfolding narrative does seem compelling, how does Deere & Co stack up in terms of fundamentals? The price-to-sale ratio and operating margin were well up on the five-year average at the 2021 year-end, while return-on-equity came in at 38 per cent. Net debt is equivalent to 3.6 times cash profits, with the multiple shrinking appreciably since 2015.

These positive metrics have not gone unnoticed. The average price target among the analysts covering the stock is 5.8 per cent in advance of the current share price, while a price/earnings-to-growth ratio of 1.3 suggests that investors might be paying too much given the stock’s perceived growth characteristics. But the rating is well below the long-term average and seems relatively modest when set against some other blue chips. Analysts will be looking closely at the scale and breadth of the 8R roll-out. Deere & Co is a low volatility, lower-risk option for investors looking to profit from the profound changes under way in agriculture, although it remains to be seen whether these types of technologies will be the preserve of ‘big farmer’, or whether they will find wider application.

Read more: 

John Deere & Co: modestly rated at the vanguard of digital agriculture

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