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Generally speaking, high crop prices are good for farmers, and what's good for farmers is good for the companies that supply them. The problem is when crops are expensive, not because of increased demand, but because supply is low due to poor crop yields. No matter how high prices go, it doesn't do farmers any good if they have nothing to sell. Fortunately, science sometimes comes to the rescue.
Some of the first science ever
While irrigation has been used to fight drought for thousands of years, irrigation technology has come a long way since the first Mesopotamians dug drain trenches through their fields. Unfortunately, the vast majority of farmers around the world still use the same methods as the ancients -- methods that can be enormously wasteful and inefficient.
That presents a huge opportunity for high-tech irrigation companies like Lindsay Corporation (NYSE: LNN ) and Valmont (NYSE: VMI ) . Both companies produce low-energy precision application (LEPA) center pivot sprinklers, which are to flood irrigation what satellite-guided missiles are to a volley of arrows. LEPA center pivots are gigantic machines, often a quarter-mile in radius, with an intricate trellis system hanging just above the plants, so that very little water is lost to wind or evaporation. They often use satellite imagery and GPS guidance to ensure an even amount of water is applied to all of the crops. This method of irrigation ensures that about 90 percent of the water used makes it to the crops, versus about 50 percent for traditional methods.
Both companies are basically neck and neck for metrics like profit margin and revenue growth. Lindsay has had stronger free cash flow growth, but this is more due to Valmont building up its working capital than anything else. Lindsay actually averages a higher investment in capital expenditures, which would ordinarily drag down free cash flow, but since the company is essentially debt free, it can afford to.
Even though both companies perform about as well, Lindsay has long been my favorite because its primary focus is irrigation, while Valmont applies more of its tube-making expertise toward infrastructure projects like utility pylons and street lights -- projects that are more dependent on waning government spending.
Fighting the problem at the source
If irrigation is one of the oldest methods of improving crop yields, genetic engineering is the newest. Why waste time and money trying to get all that water to your crops when you can just start with seeds that don't need as much water to begin with?
High-tech seed manufacturers like Monsanto (NYSE: MON ) , Syngenta AG (NYSE: SYT ) , and DuPont (NYSE: DD ) have developed drought-resistant seeds that can produce higher yields than their conventional counterparts during drought years. The only brand widely available so far is Optimum AQUAmax by Pioneer, a division of DuPont. It has been shown to produce 3.7 percent higher yields in normal years and 7 percent higher yields in drought years. That doesn't sound like a lot, but when crop prices skyrocket on the expectation of a bad harvest, any edge can be a great advantage.
The drought-resistant seeds from Syngenta and DuPont are important because they are made using native corn traits, while Monsanto's seeds splice in traits from other plants. That difference matters in certain markets like Europe, which has strict laws regarding genetically modified foods. France has even attempted to ban some of Monsanto's genetically engineered products.
DuPont has reportedly already sold out of out of its AQUAmax seeds for this year and is working hard to produce more for next year, while its rivals are expected to bring their own drought-resistant seeds to market around the same time.
The Foolish bottom line
Irrigation and better seeds can't generate miracles. But when the world is hungry and huge crop profits are just out of reach, any advantage is welcome. Improving yields in drought years will go a long way toward securing our food supply, and these companies are at the forefront of the technology that will accomplish that. Add them to My Watchlist today to stay updated.