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Tractors Roll In as People Move Out of Rural China

Stocks in this article: AGCO BASFY CNHI DE KUBTY MON NAV

BEIJING (TheStreet) -- The flip side of China's ongoing urbanization program, which has been moving about 25 million rural dwellers into cities every year, is a big push for more labor-saving machines on farms and at food-processing factories.

That's good news for manufacturers of tractors, fruit-sorting machines, refrigeration systems and fertilizers, including several U.S. companies that in recent years have gotten into China by forming joint ventures with state-owned firms.

The Chinese government has been encouraging modernization of a nationwide agriculture industry that in many ways still relies on calloused hands more than gas-powered machines.

Only about 33% of the nation's corn and 69% of the rice crops are mechanically harvested every year, according to a recent Ministry of Agriculture report. And based on the monetary value of market-ready products, the ministry said, 72% of the nation's post-harvest processing tasks, such as fruit sorting and cabbage packing, are still done entirely by hand.

These percentages have been falling annually as farm cooperatives and processing companies buy more machines, often with help from government subsidy payments, and as more people leave the countryside to work in big cities. What the agriculture ministry calls the "national comprehensive mechanization" rate on the nation's farms rose to 55% in 2011 from 53% the year before.

These and other statistics point to tremendous potential for sales of agriculture equipment including tractors made in China by ventures linked to Deere & Co. (DE), Agco (AGCO), Japan's Kubota (KUBTY) and CNH Industrial (CNHI). U.S. engine maker Navistar (NAV) also has a hand in the Chinese farm machinery sector.

Deere has been widening its Chinese footprint since partnering with Chinese tractor-maker Benye in 2007. The Illinois-based Deere says it spent four years upgrading Benye's manufacturing plants in Ningbo to produce a range of fuel-efficient tractors.

The total number of large tractors of all brands rolling through farm fields nationwide rose 12% to 4.4 million units between 2010 and 2011, according to the agriculture ministry's most recent data. The number of tractors of all sizes climbed 3.6% to 22 million during the same period.

Also standing to benefit from farm modernization are Monsanto (MON), BASF (BASFY) and other companies that sell seeds, fertilizers and agrochemicals in China.

Moreover, the agriculture ministry recently announced incentives for food-processing companies that install mechanical systems for cleaning, drying, refrigerating and packaging products to replace employees who move away. A potential beneficiary is Colorado-based Atlas Pacific Engineering, a maker of machines that peel apples and pit peaches.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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